Poland: ECM bounces back as pension fears fade
Funds ‘more selective’, say bankers; private equity exits boost supply.
There were some concerns that the pension fund reform would spark a massive sell-off in Polish equities or affect the appetite for new issues, but those worries have
SME lender Idea Bank was first to market, raising Z254 million ($67 million) at the start of April. Wirtualna Polska, the owner of Poland’s largest internet portal, and automotive parts maker Uniwheels subsequently closed deals worth Z294 million and Z504 million respectively.
The IPOs were the first from mid-cap companies on the Warsaw Stock Exchange since July 2014. Bankers say the pick-up in activity demonstrates a return of confidence in the ability of the Polish market to absorb transactions following the partial nationalization of the second pillar pension funds, previously the largest equity investors on the WSE.
“There were some concerns that the pension fund reform would spark a massive sell-off in Polish equities or affect the appetite for new issues, but those worries have now dissipated,” says Georg Hansel, chairman of ECM EMEA at Deutsche Bank.
Bankers note, however, that the changes to the private pension system – which included a big reduction in monthly inflows to the funds, as well as the lifting of restrictions on investing in non-Polish equities – have affected both the depth and nature of demand for new issues.
“In the past it was much easier to successfully close a transaction thanks to the steady inflows into the pension funds,” says Filip Paszke, head of local investment bank PKO BP Securities. “The funds are still active but they have become much more selective. They are looking for more liquid deals with good equity stories and have a preference for dividend yield as they have now started to make pension payments.”
The fact that some share sales have fallen short of their target shows how the market has changed, Hansel adds. “As in any other market, for a transaction to be successful in Poland today it needs to be high-quality and well-prepared,” he says.
An illustration of the limits of investor appetite in the current Warsaw market was provided by Idea Bank’s IPO. The lender’s majority owner, Polish financial group Getin Holding, had been targeting an offering of up to Z864 million, comprising new and existing stock. Lack of demand, however, prompted a reduction of the deal to Z480 million of new shares only, part of which was taken up by Getin.
Bankers in Warsaw attribute the initial deal’s failure to overly ambitious price targets, Idea Bank’s limited track record – the lender was founded in 2011 – and the competitive nature of the sector. “Banks are by far the largest component of the major indices in Poland, so to float a bank you need to have a strong equity story, good growth prospects and a very attractive valuation – particularly this year, when the sector has been hit by concerns around Swiss franc mortgages and low earnings growth,” says Paszke. “It’s a very difficult market at the moment for stories that have any sort of flaws.”
He notes that a much larger secondary sale of 15.4% of its Polish subsidiary by Portuguese lender Millennium BCP, launched at the end of March, succeeded in raising Z1.2 billion. “Bank Millennium is a listed lender with an established investor base that knows the company and knows the management, which is why they were able to complete a successful placement,” he says.
The heavy weighting of banks on the WSE – a result of the insistence by the Polish regulator that foreign lenders float their local subsidiaries – means companies from other sectors will be preferred by investors, according to Andrzej Powierza, an equity analyst at Citi in Warsaw. “If there is a choice between a banking IPO and a non-banking one, investors will always opt for the latter,” he says.
Hansel at Deutsche Bank notes that investors are equally keen to diversify away from the other main sectors in the WIG20 index, utilities and natural resources, neither of which offers exposure to Poland’s strong economic growth.
As a result, he adds, consumer-driven stories will attract very high levels of interest. “There is a shortage of good-quality mid-cap names in that segment so valuations are high and any company that comes to market will see strong competition between international and domestic investors,” he says.
That augurs well for Etos, the owner of Polish fashion chain Diverse, which is due to bring its IPO before the end of June. The firm will be brought to market by its private-equity owner Abris, which completed successful exits from fleet management company Masterlease and aluminium parts maker Alumetal via the WSE in 2014, and has announced plans to list waste management firm Novago next year.
A private-equity firm, Innova Capital, was also responsible for the Wirtualna Polska IPO, prompting bankers to hail the sector as a promising new source of primary supply. “Now that several firms have completed successful deals I am sure we will see more from the sector,” says Andrzej Olszewski, head of coverage and investment banking Poland at Société Générale.
At least one more large private-equity exit is reported to be in preparation for this year, along with a dozen other primary and secondary offerings. Bank Pocztowy, Poland’s postal bank, was added to the list at the end of April by its owners PKO BP and Poczta Polska (Polish Post). Plans for a flotation of the latter in 2016 were announced at the same time.