Translation. Region: Russian Federal
Source: Moscow Exchange – Moscow Exchange –
An important disclaimer is at the bottom of this article.
Natalia Loginova, Director of Issuer Relations at Moscow Exchange, discusses investor and company appetites, IPOs, and what happens afterward.
This year, IPOs have been put on hold. Companies that announced their readiness to go public in the spring have postponed their plans indefinitely – the stock market, like many industries, is reeling from the interest rate crisis. As a reminder, 2024 saw a ten-year record for the number of IPOs: 15 new issuers listed on the exchange and four more held SPOs. Since then, the share prices of many new issuers have fallen along with the market, causing widespread discontent among private investors who were the basis for most of the IPOs. However, the overall market has also declined during this time.
Meanwhile, in early September, VTB successfully completed its initial public offering (SPO): the bank raised 85 billion rubles, with demand exceeding supply by more than twofold, and 41% of the issue being purchased by private investors. This demonstrates that there is indeed money and appetite for shares in the market.
For many years, the Moscow Exchange has been meticulously working with potential issuers, promoting the very idea of publicity and capital markets. Natalia Loginova, Director of Issuer Relations at the Moscow Exchange, spoke to Monocle about why even companies ready for IPOs are currently hesitant to enter the market, how IPOs work, and how to align the expectations of investors and issuers, which are currently very distant. "After a long pause, reports have emerged that we will finally see some IPOs on our market before the end of the year. What has changed?"
"The rate has dropped, the conditions have improved, and perhaps the placement window will open a bit. But overall, we've lowered our expectations: if at the beginning of the year we thought we might see ten or fifteen companies on the market, now it's clear that's unrealistic."
Companies themselves want to enter the market, and many are ready—technically and psychologically—but when the "key" is high, investors are exiting shares, and this is a normal market movement. Now is the time to buy debt instruments that offer super-profitable returns for investors (and super-unprofitable returns for issuers). Incidentally, this is a rare moment in the Russian stock market when investors can so easily earn a sufficiently high return.
The equity story (stocks – Monocle) is beginning to unfold in the overall market at a time when rates are low. This is confirmed by the promising start of new IPOs after 2022, when rates first rose to 20 percent and then fell to four percent. This is precisely when the market entry story began, as investors were looking for yield.
"But there's a bit of a paradox here: during that period, companies were actively going public because they could sell for a higher price. And for investors, it's logical to buy when rates are high, and if a company does go public, it's at a low price, and then you'll have an upside."
Yes, this asymmetry always exists. But the beauty of the market is that it somehow evens out these imbalances and asymmetries. Currently, the market is clearly skewed toward debt instruments and investor benefits. There are no benefits for either equity or bond issuers. What kind of profitability is required to attract debt at 20-30 percent and sustain this burden? The economy suffers as a result.
We all love it when a stock gains 20 percent or 40 percent on the first day of trading after an IPO. But in reality, this excessive volatility is detrimental to the stock. It means other investors will forget about it.
– Does the “buy and hold” principle still work?
– Classic stocks always provide higher returns over the long term. At a minimum, stocks absorb inflation. And if your portfolio consists of stocks of efficient companies with higher profitability and growing faster than the overall economy, increasing their market share, then you as an investor earn even more.
It's clear that investing in stocks always comes with increased risk, but if your portfolio doesn't include stocks, you're missing out on a potentially interesting asset.
– Do we have the potential to grow our investor base?
The potential for real demand in the market is concentrated in a very narrow segment of our wealthy citizens. Currently, their main assets, aside from their own businesses, are mostly in the form of deposits. This is good in the short term, but deposits don't cover inflation over the long term. Wealth studies conducted by Swiss banks indicate that at least a third of the typical wealthy individual's portfolio is held in public company shares.
Our wealthy citizens don't have this in their portfolios (not their businesses, but companies where they hold minority shareholders) – and this is a threat to their portfolios; they're clearly missing out on some growth opportunity for their children and grandchildren. Do you want to pass on a portfolio that will grow for your children and grandchildren? If so, then withdraw some of your savings, at least ten percent, and invest in stocks.
It may be psychologically very difficult, but we need to change our approach, because no one but us can help us. If we live in this country and want it to become rich, then we need to be part of this process, including as an investor.
Moreover, wealthy citizens would be especially useful to the market as portfolio investors: they didn't just become wealthy. They possess power that they can channel into the market. They would be a very useful pike in our river, helping those crucian carp—public companies—keep their composure. I believe this is extremely important.
How to Tame Your Emotions in the Market
A number of state-owned companies are expected to enter the market by the end of the year, and there are already estimates that privatization could push the Moscow Exchange index to 4,000 points. Moreover, you've also estimated that qualified investors with significant capital are dissatisfied with the number of issuers. Is it logical to expect that with the increase in the number of issuers on the market, new capital from these large investors will also appear?
"It won't work as clearly as you said. We have a problem in the market: money is concentrated, making it difficult for them (in this case, institutional investors – Monokl) to participate in IPOs where the deal size is three to five billion rubles. They prefer large companies to enter the market. But a large company wants a high price. So investors and issuers are stuck, like two sumo wrestlers, wondering where they'll meet."
– But VTB attracted 85 billion, and their demand was twice as high as their supply.
– So, they managed to bring sumo wrestlers together – by offering an attractive price, a discount.
It's simple. VTB already has a market price, VTB offers a discount on it, and, of course, people will come because they'll immediately lock in a profit in their portfolio.
But companies, whether state-owned or private, that aren't yet on the market don't have a market price. And the ideal, the idea of where their market price should be, can be far from reality.
– They haven’t adjusted their ideas in any way this year?
"This becomes clear during the transaction process. Companies begin talking to investors and receiving feedback. If there's indication that there's appetite, that they're willing to buy at that price, the deal goes through—provided the company is technically ready, has good corporate governance, good reporting, and meets listing requirements. If there's no deal, it means there's no positive feedback."
– And if the positive feedback is too strong, is that precisely the moment when the price increases?
– Yes, if a company sees that there is very high demand, then, of course, it can raise the price.
– And then, with a high probability, the paper will not grow rapidly after the IPO…
"We all love it when a stock gains 20 percent or 40 percent on the first day of trading after an IPO. In reality, this extreme volatility is detrimental to the stock. Sure, there's a dopamine kick: wow, I made 90 percent on the first day of trading. But that means other investors will forget about the stock because there's nothing left to earn. And the issuer needs to maintain and expand its investor base."
And vice versa: the price of a security has fallen. The company must actively communicate with the market, saying: don't worry, fundamentally everything is fine with us, our business plan remains unchanged. And at the same time: guys, the price has dropped, we need to buy.
In general, we are very susceptible to emotions, although in general they are needed in the market, just not in such a wide range.
Turbulence: What Should Investors Do?
Regarding investor communications, the Central Bank wants to standardize, simplify, and make it clearer. And at the same time, it wants to ensure that the development plans published by future issuers are more realistic. How will this impact the quality of IPOs?
So far, the market has been cautious about the regulator's initiative to include company forecasts in the prospectus. A prospectus is a responsibility. In other markets, prospectuses typically contain no forecasts at all. What's the position in Russia? Saying nothing about yourself is probably also unacceptable. But you can understand how a company will perform based on several sources. The first source is the strategy outlined in the prospectus, including an analysis of past periods. Over three years, we've achieved such-and-such a level of performance, and our strategy states that we'll grow from point A, where we are today, to point B. This is essentially a forecast, but without quantitative indicators.
"Both the stock exchange and auditors always tell issuers: build a clear strategy, communicate with investors. But we're living on a volcano. Today, let's say, one company decides to go 100 percent public, and tomorrow it's already been bought up and turned private. Tomorrow, another one is taken over by the state. How can we build a market in conditions of constant turbulence? Can we even calm down in our market and say: yes, I bought an IPO for ten years, and I'll sit and wait, and nothing will happen to this company, the business will continue to function."
"Let's put it this way: when you buy a stock for the long term, five or ten years, you shouldn't monitor it daily. You should first assess whether the business will be as successful in the future as it is now. And don't worry about the stock price. Moreover, you don't necessarily have to buy shares at the IPO; you can always do so on the secondary market. It's just that without an IPO, new companies won't appear on the market."
And if there's any major news that the market where this company operates is undergoing a complete overhaul, that will be a reason to evaluate and perhaps move from this stock to another. But that will rarely happen.
The second part of your question concerns the system for protecting investor rights in the market. We have a law on joint-stock companies, which stipulates that when an ownership change occurs or when certain shareholding thresholds are crossed, the new owner must make a mandatory offer. We personally believe this should apply to any owner replacing the previous owner. Therefore, we strongly hope that in the cases you're referring to, the owner replacing the previous owner will comply with the law on joint-stock companies and, if their stake exceeds a certain threshold, make a mandatory offer to minority investors.
The third part of the question concerns the high level of operational and financial uncertainty the company faces. A business shouldn't comment on its share price, but it must be consistent and constant in its communications with the market. Let's say a company enters the market to raise new capital to open 200 stores in 50 regions of the country. After some time, it opens 150 stores and announces that, in its opinion, it doesn't need another 50 stores, so it's settling on 150. This means communicating regularly, consistently, and being able to conduct crisis management communications, among other things. And you won't believe it, but many investors, even during a crisis, stay with a company that is honest with them.
The price of publicity
The Moscow Exchange had estimates of 300-500 potential issuers. But it's clearly not time for them to tap the capital market yet. What are they waiting for?
– To begin with, I would like to clarify that the task of doubling or even tripling the capitalization of the stock market, as we believe, is solved, rather, by revaluing our market, which, in terms of multiples, is quite cheap.
But the multiplier is the flip side of risk in the system. Even in India, with its higher multipliers, the cost of risk is lower than in Russia. Therefore, our task is to reduce the overall cost of risk in the Russian economy so that the multipliers can grow. To do this, we need to remove elements of uncertainty and protect investors' rights.
As for those 300-500 companies, these are companies that could go public if they wanted. But some simply don't want to go public. And that's okay. For example, it recently became known that Armani included a will to take his business public, even though he hadn't wanted to do so during his lifetime. That happens, too. Perhaps the company owner has children who don't want to get involved in business, and then a public company with a board of directors and a competent CEO could be given to them, so the business wouldn't require their involvement in management.
And I still hope that we will see companies emerging that we don’t see yet because they haven’t grown up yet.
It is important to stimulate and provide opportunities to attract capital in the market for those who want to develop and who will be the foundation of the new economy.
"It's generally accepted that being public is expensive. You're constantly maintaining a board of directors, disclosing information—all of that costs money."
"Basically, it's called investing in yourself. If you don't have IFRS, how do you analyze yourself? It's also important who audits these reports and helps you identify inefficiencies."
Next, corporate governance. A one-man show is a risky strategy, and it's advisable to have advisors on hand—that's how an advisory board comes into being, people with different experiences and professional competencies. If you go public, this will become a board of directors. I tell everyone: IFRS, auditors, a board of directors—it's not investors who need these, it's you as a business who need them.
We don't yet have a developed pre-IPO segment, which, in theory, should serve as a breeding ground for new issuers. What should we do about it?
The pre-IPO market is starting to take shape, and some money is flowing into private equity funds. Of course, we need this fertile groundswell of the venture capital industry, the private equity industry, to prepare companies for us so they can follow this ladder, starting with angels and venture capital, private equity, and then the public market. That would be great, because it would be the companies that would go public, but that's not the case yet. Right now, it's the opposite: high-risk companies can go public immediately, and then private equity funds and venture capital firms begin to follow.
But, again, pre-IPO money is starting to flow in. Why don't companies want to deal with it, instead going straight to the market or investment platforms? Any venture capital or private equity fund is attentive, meticulous, sets conditions, and requires a management position. And companies are deciding to go directly to retail investors, who won't impose conditions and can even save on commissions. So everyone needs to find a balance here, and perhaps funds should be more flexible in their investment terms.
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Please note: This information is raw content obtained directly from the source. It represents an accurate account of the source's assertions and does not necessarily reflect the position of MIL-OSI or its clients.