Bridging Private Equity and IPOs
Director of Equity Financing, FINAM Investment Company, Moscow
Getting from point A to point B in Moscow is not easy, and neither is preparing an IPO - but new types of financing are giving Russian companies a chance to get capital moving
(Photo by: English Russia)
Over the last year several pre-IPO funds have emerged as investment vehicles in Russia. Generally speaking, pre-IPO financing is a hybrid instrument that combines features of both Private Equity and IPO financing. Over 90% of all Russian companies that completed IPOs started with private placements, and pre-IPO financing is an extremely useful instrument to accelerate Initial Public Offering. The most acceptable candidates for such transactions are the ones that are considering IPOs, but lack expertise and/or resources to properly prepare an offering. Generally speaking, most of the pre-IPO funds have the following characteristics:
- Investment takes place between 24 months and 12 months prior to IPO
- The usual stake does not represent more than 2% - 20% of the equity
- Investments are in cash, in return for equity, with an agreed package of securities as a fall-back plan, should the IPO fail
- Control of the company is not one of the investor’s objectives
Click on the extended post to read more.
Natalya Ivanova directs Renaissance Capital's pre-IPO fund
The most successful fund to my knowledge is the Renaissance pre-IPO Fund. The Fund is seeking two types of investments:
• Acquisition of equity in unlisted companies with “private equity” type structuring and exiting in two–three years (higher upside)
• Acquisition of equity from the Russian Trading System (RTS) board, Over-the-Counter (OTC) or RTS B in case a formal IPO is coming up on a Russian or overseas trading floor (lower upside)
• Free cash to be placed in deposits with maximum time/interest ratio and exposure both to U.S. dollars and Russian rubles
The Fund is listed on Bermuda’s stock exchange with shares trading on the IOB at the London Stock Exchange. The firms are aiming to list on public markets, mostly in Russia.
According Natalya Ivanova, director of the Renaissance pre-IPO fund, “we prefer new-economy companies like technology, media and telecoms (TMT), where the return cannot fall so much as well as consumer companies and banks.” While the fund is investing in long-term holdings (especially compared to some hedge funds), its investors can buy and sell shares in the special structure with Renaissance Capital acting as the market-maker. The fund with an independent administrator offers a daily Net Asset Value (NAV) calculation and Ivanova strives to offer investors as much information on investee firms as possible.
The Fund is a proven success and you may see its major characteristics (as of March 2007) in the following graphs:
Source: Renaissance Capital
Some other pre-IPO funds that operate in Russia:
- Zimmerman Adams International Ltd (London) and First Mercantile Capital (Moscow) pre-IPO fund to provide financing for Russian and CIS companies
- UFG Russia Alternative Fund launched on November 1, 2006 to operate in Russian and CIS market.
- Some time ago I wrote that PIO Global Asset Management is considering establishing a pre-IPO Fund that would invest in SMEs (future Russian small caps) shares that are preparing for IPOs. One option is to domicile the pre-IPO Fund in Russia and legally form it as a closed-end mutual fund. According to Russian securities laws, it is not permitted to form a Fund’s portfolio exclusively with low- liquidity shares. Thus one of the solutions would be to include some “blue chip” stocks in it
- Troika Dialog is establishing $ 300 million pre-IPO fund with proposal from the European Bank for Development and Reconstruction (EBRD), to provide $150 million in credit for it.
With the continuing upstream of Russian IPOs (the latest update you may find at this Reuters news feed), I submit that in the next few months we will witness the emergence of even more funds of this type.
Personal Notes:
I am implementing a new approach on my blog: instead of producing a review of Russian IPOs every week, I will simply post my thoughts on the latest developments in CIS business and financial markets as they happen. Furthermore, I would like to give my best regards to my new Russian friend Maxim Lesine in Italy, who translates my posts into Italian and puts them up on his blog. Although he does not credit this blog as his source, I appreciate Maxim introducing Italian-speaking readers to this site. WELCOME ABOARD, Maxim!
You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and are reproduced here solely for educational purposes. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.
Comments
Dear Vladimir, You are definitely right about my posting without specifying the source. Next time I will include it to my post by linking to original post of you. I am posting without any lucre, just to inform the interested readers. Actually I am posting in the test version of my blog. I have noted some interest of Italian readers to Russian business on the whole and in particular mode of russian-italian partnership. In one month of posting I saw visitors from ENEL and ENI, Italian business structures, and even Italian Parlament deputies (Camera dei deputati) are reading my posts. Even different countries such a Switzerland, Germany, Spain, Lithuania, USA, Australia and Indonesia. If we can make a cooperation it would be a great deal for Russian business interests in Italy. Best regards, Maxim
Posted by: Maxim Lezine | July 12, 2007 10:58 AM
Maxim!
Welcome on board! And wish you success
Vladimir
Posted by: Vladimir Kuznetsov | July 12, 2007 11:38 PM
i am from india , want to invest in abroad or any were, how it can be possible
Posted by: shashikant kumar pathak | January 19, 2008 2:49 AM