Hard on the heels of two blockbuster tech IPOs, Warsaw’s stock exchange is planning a new drive to bring Polish companies up to speed on sustainability.
The bourse has already undergone a remarkable transformation. Five years ago, when the Polish government announced plans to hollow out the pension funds that provided the majority of demand for local equities, many wrote the market off as moribund.
The interest of foreign investors, sparked by a series of bumper privatizations in the early 2010s, was already waning, thanks to the lacklustre performance of the banks and energy stocks that made up the majority of the WIG Index.
Repeated attempts to create a regional hub in Warsaw had produced little beyond a clutch of Ukrainian listings, which were badly hit by the country’s economic crisis in 2014. The episode discouraged early experiments in equity investing by Polish retail investors, as did the bankruptcy in 2018 of local debt collector GetBack, less than a year after a much-hyped $100 million IPO.
Even the upgrade of Poland to developed market status by FTSE Russell in September 2018 failed to revive the market’s fortunes. The following year, new listings amounted to just $15 million, according to Dealogic, the lowest annual total since 2001.
Today, the picture could not be more different. After a series of successful listings, including the $2.7 billion IPO of e-commerce giant Allegro in October, companies from tech-related sectors now account for more than a third of the market cap of the Warsaw Stock Exchange (WSE).
The market is becoming more reflective of today’s economy rather than the post-communist economy
Piotr Chudzik, Trigon
Many of these come from the thriving local gaming industry. Inspired by the success of CD Projekt, which last year reached a market cap of $9 billion, Polish games developers of all sizes have rushed to the equity markets over the past two years.
Gaming stocks accounted for more than half of IPOs in 2019 and 2020, and the $442 million listing of Huuuge Games – due to be completed on February 19 – will take the number of gaming companies listed on the WSE’s main market to 15.
A further 40 firms from the sector are listed on junior exchange New Connect, making Warsaw the number one exchange worldwide for gaming stocks, ahead of previous leaders Tokyo and South Korea.
“Previously the international perception of the Polish stock market was that it was boring and dominated by old economy names, mainly from the banking and resources sectors,” says Piotr Chudzik, managing partner at Polish investment bank Trigon. “The market is becoming more reflective of today’s economy rather than the post-communist economy.”
The shift has attracted a host of new international equity buyers to Poland. Around 60% of stocks listed in Warsaw are currently held by foreign investors, up from 49% in 2014, thanks in part to strong demand from global tech funds for the Allegro IPO.
Despite the progress, Warsaw missed out on the $3.4 billion IPO of Polish parcel locker InPost in January, which went to Amsterdam for reasons that remain unclear but are understood not to be linked to any concerns about the capacity or efficiency of the local market.
Surge in trading
Local retail investors have nevertheless flocked to the capital markets in unprecedented numbers, drawn by a combination of new names, healthy valuations and plummeting interest rates. Nearly 85,000 new retail accounts were opened with Polish brokers in 2020, according to the WSE.
This in turn helped to drive a surge in trading in ETFs, which saw turnover more than triple last year, as well as in structured products, which proved popular with Polish investors looking to profit from the downturn in oil and other commodities.
Overall turnover on the WSE’s main market was up 55% year-on-year in 2020, while trading on New Connect rose by 925%, again thanks largely to local retail demand.
The pace of listing activity looks set to continue this year. Izabela Olszewska, a member of the management board at the WSE, says the bourse has a “good pipeline” of companies waiting to list in the gaming and e-commerce sectors.
“The revival of the IPO market has been hugely important for us,” she says. “The fact that a company as big as Allegro can easily find capital on the Polish market shows that we have access to a diversified investor base and is a great signal for other potential issuers.”
Tim Umberger, a partner at emerging markets fund manager East Capital, agrees. “The fact that Polish companies can get top dollar valuations and that clients really want to participate in these transactions is a very positive signal and bodes well for the future development of the market,” he says.
He reports that as many as 20 gaming companies are currently preparing to IPO in Warsaw “as well as names in other new economy sectors such as biotech”.
“It’s a reflection of the transformation of the Polish economy and it clearly makes the market much more attractive, because it expands the range of sectors and companies available to invest in,” he says.
ESG next
Trigon’s Chudzik says that solar energy could soon to be added to the list of sectors available in Warsaw.
“Poland currently has a very favourable regulatory regime for photovoltaic energy production, which is attracting a lot of entrepreneurs to the sector, and many of them are thinking of going public,” he says. “This will likely be a big new trend for the second half of 2021 and 2022.”
That could give a welcome boost to a drive by WSE to position itself as a leader in sustainability. As in much of emerging Europe, Polish corporates have lagged their counterparts in the west when it comes to environment, social and governance (ESG) issues.
To bring the market up to speed, the WSE last year partnered with the European Bank for Reconstruction and Development and sustainability consultancy Steward Redqueen to devise a framework for ESG reporting for Warsaw-listed companies.
The WSE – which is itself publicly listed – has announced plans to produce an integrated sustainability report according to the standards of the Global Reporting Initiative. Meanwhile, its subsidiary, GPW Benchmark, is developing a series of green indices.
As part of the project, the bourse is also working to educate Polish issuers about the benefits of embracing sustainability and transparency. “In the past, companies sometimes viewed ESG reporting as an additional burden, connected with the capital markets,” says Olszewska.
A key driver of the WSE’s sustainability initiative has been the increasing sensitivity of foreign investors to ESG issues.
EU regulation is a huge catalyst for the changing behaviour of companies and investors when it comes to sustainability
Izabela Olszewska, WSE
“International funds look at investment targets through the lens of ESG and if companies aren’t willing to integrate this into their strategy and reporting then they will be blacklisted,” says Olszewska. “We want to keep these investors in Poland, so we see it as a key part of our remit to help our issuers understand ESG criteria and reporting.”
Local institutional investors have been slower to adopt ESG practices – but again, Olszewska says attitudes are changing.
“Over the past few years, as in many other countries, the acceptance of ESG integration within their investment methodologies has increased,” she says. “This is coupled with more and more published information providing evidence for ESG performance being linked to improved long-term performance.”
She adds that the shift has been accelerated by European Union initiatives, such as the Sustainable Finance Disclosure Regulation (SFDR), which comes into effect in March.
“EU regulation is a huge catalyst for the changing behaviour of companies and investors when it comes to sustainability,” she says. “The SFDR will really accelerate the process by pushing funds to collect data and report in line with ESG standards.”
At the same time, Olszewska notes that – as in other markets – a new generation of investors in Poland are proving to be more sustainability-conscious than their parents.
“We are seeing a different attitude towards ESG from younger investors,” she says. “Millennials and Gen Z want to invest in companies that provide a cleaner and better world for them.”
