Russia equity markets back in business as IPO trio find demand

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By:
Lucy Fitzgeorge-Parker
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Primary issuance back to 2013 levels; private-sector names prove popular with investors

Surging share prices attracted a clutch of Russian companies to the equity capital markets in November, putting the sector on course for its busiest quarter since early 2013. 

The $1.5 billion IPO of En+, the aluminium and power group owned by Oleg Deripaska, dominated headlines, but listings by two smaller domestic firms and a series of secondary deals received a more enthusiastic welcome from fund managers focused on emerging Europe.

“Investors want to see private companies, ideally exposed to the Russian domestic segment or consumer demand, which has been rebounding over the past year to 18 months,” says Dmitry Brodsky, head of Russia and CIS ECM at Renaissance Capital.

Obuv Rossii, the first of three new companies to come to market this autumn, ticked all these boxes. The shoe retailer, which priced a R5.9 billion ($103 million) IPO in Moscow in late October, was raising funds to double its national footprint to more than 1,000 stores. 

Dmitry-Brodsky-160x186
Dmitry Brodsky,
Renaissance Capital
The listing was only the second by a Russian company this year, following the $324 million IPO of children’s goods retailer Detsky Mir in February, and the first small-cap listing from the country since the annexation of Crimea and the imposition of western sanctions in 2014. 

Despite its restricted size, the deal attracted strong interest from western investors. More than three quarters of the shares went to emerging market fund managers, mainly in London and Scandinavia. 

“There was a lot of demand for Obuv Rossii because – like Detsky Mir – it offers exposure to non-food retail, which is rare in Russia,” says Brodsky.

Two weeks later, Russian haulage operator Globaltruck priced an even smaller IPO in Moscow. The listing raised just R3.5 billion but again attracted attention from international equity buyers. 

Jacob Grapengiesser, a partner at specialist emerging and frontier market asset manager East Capital, confirms that names such as Obuv Rossii and Globaltruck are what western investors are looking for in Russia. 

“These are young, entrepreneurial firms that are not political in any way, with clear, transparent and understandable stories,” he says. “That is of course what investors want. Whenever a deal gets complicated, political investors will put a discount on it.”

This may account for the relatively lukewarm reception accorded to En+, which completed a dual listing in London and Moscow on November 3. 

The IPO was the largest share sale from Russia since VTB’s $3.2 billion secondary offering in 2013. As with that deal, however, the success of the En+ listing was heavily dependent on orders from state-linked actors in other emerging markets.

The anchor investor for the IPO was a subsidiary of AnAn Group, a Singapore-based company linked to Chinese conglomerate CEFC. The acquisition of $500 million of En+ shares by AnAn came barely a month after CEFC agreed to pay $9.1 billion for a 14.2% stake in Russian oil giant Rosneft.

"Whenever a deal gets complicated, political investors will put a discount on it"
- Jacob Grapengiesser, East Capital


Nominally a private-sector firm, CEFC is reported to have close ties to the Chinese state. The Russian deals are the latest in a three-year CEE shopping spree that has already seen the group snap up multiple assets in the Czech Republic – including J&T Finance Group, a brewery and a football club – as well as oil refineries in Romania and an industrial zone in Georgia.

Qatar’s sovereign wealth fund also participated in the En+ listing, taking $300 million of the deal, while the state-owned Russian Direct Investment Fund accounted for a further $25 million. 

Private-sector fund managers were less enthusiastic, however, with some citing high debt levels at En+ Group – which includes 48% of Hong Kong-listed aluminium producer Rusal as well as Russia’s largest hydropower producer – as cause for concern. 

Representatives of En+ say proceeds from the listing will be used to pay down part of its $5 billion debt burden.

Weak demand

Links between Deripaska and Paul Manafort, Donald Trump’s former campaign manager currently facing money-laundering charges in the US, may also have contributed to scepticism about the En+ listing, according to one emerging markets fund manager.

“If you’re a US investor, that probably would matter,” he says. “Deripaska is not sanctioned, but clearly he is close to the Kremlin, so that would likely be relevant.” 

These concerns may have been reflected in weak demand for En+ shares in the wake of the IPO. After pricing at $14, the stock had sold off to $12.80 by mid-November, although later in the month it recovered to $13.12.

This contrasted with the wider Russian stock market, which turned in another strong performance in November. The headline Micex index was up 4.1% in the first three weeks of the month, taking the total increase this year to just under 12%.

Combined with a recovering domestic economy and buoyant oil prices, this encouraged further secondary equity placements by some of the most popular Russian names. Shareholders in retailer Magnit, steel-maker Severstal and Tinkoff Bank all placed chunky blocks of stock last month. 

That took total Russian equity placements for the quarter to $3.9 billion, according to Dealogic, a level not seen since the second quarter of 2013. Bankers say further primary supply is likely as firms look to make up for time lost over the last four years.

“There is very substantial interest in IPOs from private-sector issuers who were unable to access the public markets since the Crimea events,” says Brodsky. “There have been a lot of discussions since early this year, and the firms we are seeing emerge now are those who were best prepared and willing to take the risk of being first in the market.”