News
2003/12/18
Investment firms hope for changes
By Svetlana Selyutina, Kyiv Post Staff Writer
Dec 18, 2003 02:08
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Neal Sigda, director of
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Stockbrokers say that despite the fact that Western investors are paying more attention to Ukrainian companies today than they have in the past, domestic companies will continue to be investment firms’ best clients, with strategic investors dominating among them.
The last two years have been good ones for the nation’s stock market, according to Dragon Capital Director Dmytro Tarabakin, who noted that companies’ total market capitalization grew by almost 40 percent over each of the two previous years. This year, the country’s total market capitalization is expected to reach $2 billion.
A company’s market capitalization is the total dollar value of all its outstanding shares. Capitalization is a measure of corporate size. A nation’s market cap is the combined dollar value of the stock issued by all its public companies.
Tarabakin said that the market has turned around, demonstrated by the fact that before, few were interested in buying shares issued by Ukrainian firms, but now, demand exceeds supply.
“Growing investor interest fueled the stock market in 2002,” he said. “The number of shares in circulation is far from enough to satisfy potential buyers, which has created an obvious imbalance between supply and demand.”
He attributed the imbalance to the highly illiquid nature of Ukrainian shares. Dragon Capital deals primarily with Western customers, he said.
Industry insiders say that the low liquidity is due to the fact that the country has few small investors – a problem caused by the nation’s poor corporate governance laws, which do little to protect minor shareholders.
“The rights of portfolio investors are not protected well enough. That’s why most investors tend to purchase controlling stakes rather than purchasing small blocks of shares,” Tarabakin said. “Because small stakes are not frequently available, there are few shares in circulation.”
And that creates reduced market liquidity, he added. Tarabakin said that Ukraine trails Russia, where significant steps were taken to improve corporate and public governance.
“Ukraine is just taking its first steps in this direction,” he said. “Recently, the State Commission on Securities and the Stock Market adopted a resolution that gives preemptive rights to shareholders, that is to buy shares in the new share issuer in proportion to their previously held stakes, thus avoiding dilution. This is a positive move toward defending minor shareholder’s rights, but it’s not enough,” Tarabakin said.
“This innovation improves the situation, but there still is a huge gap between our stock market and markets in Poland or Russia,” Tarabakin said.
Foreign investors have repeatedly claimed that their rights as minor shareholders have been violated. Recently, Foyil Asset Management, a Bahamian company, announced that it would work closely with the government to help improve the country’s corporate governance laws. Foyil Asset Management, which has invested $55 million in Ukraine since 1997, was moved to action after it had a dispute with Germany’s HeidelbergCement, the major shareholder in the Kryvy Rih Cement Plant, in which Foyil Asset Management holds a 10 percent stake. Foyil Asset Management charged that HeidelbergCement violated its rights as a minority shareholder by depriving it of access to information about the plant’s business activity.
“We have had many problems in Ukraine,” said Foyil Asset Management President Dorian Foyil. “We were mistreated. We’ve been diluted out of companies. We have had assets stripped from companies.” Other companies have had similar experiences, Foyil said.
With few protections in place to guard minority shareholders’ rights, only big players – strategic investors who can purchase controlling stakes – are willing to enter the market. That contrasts with markets in the West, where public companies court small investors, a primary source of corporate financing.
“Those who know the local market understand that it isn’t worth it to buy small stakes. You cannot defend your rights as a small shareholder,” said Neal Sigda, director of SigmaBleyzer’s asset management company, Ukrainian Growth Funds. Serious investors find that buying less than 25 percent of a company isn’t worthwhile as a result, he said.
“We came to Ukraine as portfolio investors, but later changed our strategy because of this. Now we act as strategic investors,” he said.
Insiders say that Ukraine could have more transparent securities and corporate governance laws soon, if it made the matter a priority. But most Ukrainian politicians are not interested in this level of transparency, they say.
Dmytry Leonov, director of the Ukrainian Institute of Stock Market Development, said that majority shareholders will eventually demand transparent corporate governance rules – but not until they have secured their own stakes against takeover.
Banks and pension funds, among the most active traders in Western markets, have also shied from the Ukrainian market because of the liquidity issue, Tarabakin said. Pension reform could change that in a hurry, insiders hope.
“Pension reform is the main argument for an optimistic view of the market’s future,” said Kinto Assets Management President Serhiy Oksanych. “The first portfolio investments will bring the stock market to life. It also will provide the first long-term, inexpensive resources to serious development programs that the economy needs so much. Pension funds can finance development in the areas of agriculture and real estate.”
Oksanych said that pension funds could accumulate a few billion dollars within four years. That capital could be invested in the nation’s public companies through investment firms and the stock market.
SigmaBleyzer’s Sigda said that an improved business climate would lead to an increase in the number of investment banking firms doing business here.
But most industry players caution against expecting too many changes too soon, with optimists estimating significant changes no sooner than 2005.
With an illiquid market, investors find that speculating in shares is almost impossible. Tarabakin said that has drawn some stockbrokers into the role of investment bankers, acquiring assets and managing them for sale later at a higher price, he said.
Oksanych said that there has been rapid growth in the number of investment companies involved in the asset management business this year.
Oksanych said that there are about 30 asset management firms doing business in Ukraine today. At the beginning of the year, there were only three. Most of the new companies are operating closed-end funds designed to finance particular projects for particular financial groups.
“In fact, there is only one open-ended fund in Ukraine – Sinergia – which is managed by Kinto,” Oksanych said. “It’s the only fund in Ukraine that works with individuals.”
SigmaBleyzer, an American-Ukrainian investment banking firm, has invested about $130 million in Ukraine since 1997 through its three Ukrainian Growth Funds, and is in the process of developing new investments. Sigda said that SigmaBleyzer intends to invest similar amounts to purchase major stakes in companies located in Ukraine and other southeast European countries. If SigmaBleyzer’s most ambitious plans come true, it could double or triple that investment, Sigda said.
“It’s difficult to convince investors to come here, because Ukraine has a bad image abroad,” he said. “There are very good companies in Ukraine, but foreign investors are not aware of them.”
“This market has huge advantages compared with markets in other Eastern European countries,” said Greg Grushko, managing director of Foyil Securities.
“The most interesting companies in Poland and Hungary belong to large industrial investors, and there is no place for portfolio investors any longer. By contrast, Ukraine is only beginning. The market has huge potential.”