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Comment by Dmitry Bolyasnikov, Executive Director, Equity Capital Markets at VTB Capital, for Euromoney

25 January 2017
Euromoney
Emerging Europe: Western banks return to Russian IPOs

International investors regain appetite for Russian stocks; public market privatizations in doubt again.

Russia’s capital markets rehabilitation gained momentum in January with the announcement of the first IPO from the country to be fully marketed to international investors since the start of the Ukraine crisis.

Sistema, the conglomerate controlled by Vladimir Yevtushenkov, has picked three bulge-bracket banks – Credit Suisse, Goldman Sachs and Morgan Stanley – as global coordinators for the planned listing in Moscow of children’s goods retailer Detsky Mir.

The last Russian IPO to feature any western banks as bookrunners was that of hypermarket chain Lenta in February 2014. The few new listings to emerge from the country since then have all been led by local investment banks and targeted predominantly at a domestic investor base.
The announcement of the Detsky Mir deal was therefore widely hailed as a further sign of returning confidence in Russian equities.

"As one of the few recent transactions to feature full marketing and a really strong syndicate, this is very important for the Russian market," says Yuri Prilipov, head of investment banking services at local securities house BCS.

Russian stocks have been among the best-performing in emerging markets since November, when the election of Donald Trump raised hopes of a speedy end to western sanctions and an agreement by Opec to cut production put a floor under oil prices.

The Micex index, which had been hovering just under 2,000 through October, soared to an all-time high of 2,285.43 in early January. Foreign buyers were among the main drivers of this recovery, with Russia-focused equity funds attracting cash in December at a rate not seen since 2011.

"At some point late last year international investors started to realize that they were missing out on growth and returns in Russia, so they started increasing their exposure to the market," says Dmitry Bolyasnikov, executive director for ECM at VTB Capital. "We expect that trend to continue this year."

In turn, the surge in share prices has attracted renewed interest from Russian firms considering a public listing.

"For most of last year, investors were still not really willing to pay what owners were looking for," says Jacob Grapengiesser, a partner at emerging-markets fund manager East Capital. "We are now getting to the point where the expectations of buyers and sellers are converging, which will be the trigger for IPOs to emerge." 

We are seeing interest in listing from new, quality names, as well as long-term candidates. We expect to see regular transaction flow this year - Dmitry Bolyasnikov, VTB Capital

Bolyasnikov says the lack of opportunities to list over the last three years has resulted in a backlog of Russian issuers waiting to come to market. "There are companies that have been in the pipeline for a very long time, and shareholders seem to have decided that they want to get ready as this year may well present the opportunity for them to tap the market."

While agreeing that the Russian primary equity pipeline is filling up, however, bankers are reluctant to name potential IPO candidates. En+, the holding company of Oleg Deripaska, was reported in December to be exploring listing options in London and Hong Kong. Another possible is said to be footwear retailer Obuv Rossii, whose planned IPO – like that of Detsky Mir – was postponed following the Russian invasion of Crimea.

"We are seeing interest in listing from new, quality names, as well as long-term candidates," says Bolyasnikov. "We expect to see regular transaction flow this year." He adds that this in turn could serve as a catalyst for widening investor focus on Russia: "It will bring Russian issuers back onto the radar of global investors, not only funds dedicated to emerging markets and Russia."

Those expecting a rush of IPO supply from Russia in the first half of the year may be disappointed, however, according to Prilipov at BCS: "It obviously takes time for companies to prepare for a listing, and the positive trends for Russian equities only emerged towards the end of last year.

"Some firms that were already well advanced in their preparations may come in the first half, but the autumn is when I’d expect to see more regular supply coming through, providing the geopolitical environment and commodity prices remain favourable."

Sovcomflot

One name that could come to market earlier in the year is Sovcomflot, the state-owned shipping giant that has been the subject of repeated IPO promises since 2010. VTB Capital was tapped in August to arrange the privatization and Alexei Yakovitsky, the bank’s chief executive, told Euromoney in October that he was confident a listing would go ahead this year.

The Russia finance ministry indicated in late January that it was aiming to raise R30 billion ($507 million) from the sale of 25% less one share of Sovcomflot, according to local media. An indicative date of March or April was given for the transaction.

It was unclear, however, if policymakers were targeting a public listing for the firm. VTB’s Bolyasnikov hedges his bets: "Privatizations could well make up a substantial part of the primary equity pipeline. There could, however, be other solutions for some of the names mentioned."

Bankers say a Sovcomflot IPO would meet with good demand from international investors. Fund managers, however, seem slightly less enthusiastic.

"We would look at it but we’d probably want some form of discount for state control," says Michael Reynal, emerging market portfolio manager at Victory Capital Management. "Private-sector consumption plays are significantly more interesting for us."

Detsky Mir’s IPO fits these parameters and is expected to prove popular with western investors. Pricing had not been released at press time but estimates of the value of the secondary listing were around $200 million to $300 million. 

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