Back when former SEC Commissioner Roel Campos scandalously compared the London Stock Exchange’s junior AIM market to a lively “casino,” his comments were largely dismissed by the monocle-bearing gatekeepers of the British stock markets as jealous Yankee poppycock. Nobody likes a whiner, but are the Americans right when they point to London’s lax corporate governance standards?
The jury may still out on that one, but London’s share of new listings is looking pretty gloomy, despite a strong growth in investor appetite for emerging markets. A new global IPO report from Ernst & Young shows that almost half of the $57 billion in global listings last quarter came from 118 flotations from the BRIC economies of Brazil, Russia, India, and China. John Crompton of Merrill Lynch says “The prospect of an economic slowdown has heightened interest in companies that have genuinely superior growth stories.” So why is London missing the boat on the IPO bonanza? One big disappoint for the LSE was the indefinite delay of the IPO of Oleg Deripaska’s aluminum giant Rusal, which was expected to raise upwards of $9 billion. Reports indicated that Rusal executives pointed to “market turmoil” as the reason for the delay, but this doesn’t make much sense, as Russia has been one of the most isolated countries from the global liquidity crunch. Other reports indicated investor’s reluctance over Russia’s poor record of shareholder rights, and their inability to influence the controlling stake of Deripaska, whose unwavering loyalty to President Vladimir Putin may be seen as detrimental with the upcoming elections. Another reason that the London IPO casino may look like it is cashing out is the disproportionately huge second quarter punctuated by the massive flotations of VTB Bank ($8 billion) and Pik Group ($2 billion). David Wilkinson, UK IPO Leader at Ernst & Young says that “If uncertainties continue around the credit crunch and access to capital remains difficult we are unlikely to see a marked shift in deal activity in the UK until the first half of 2008.” So perhaps London’s share of IPOs is falling, or perhaps it is just becoming more high quality. For example, today’s big news is that the investment firm Prosperity Capital Management is planning to raise $200 million in London by offering shares in New Russian Generation, an electricity holding company. Prosperity is headed up by the very talented Matthias Westman, who according to the FT formerly worked in Sweden’s security services (so if you have tough questions for him, be forewarned that he knows interrogation techniques). Westman told the press that unlike the share issue of OGK-2, which is controlled by Gazprom, New Russian Generation “would be an alternative to purchasing shares in an individual electricity company with a small free float or where investors faced concerns about control by Gazprom.” Now that’s a breath of fresh air. There’s more. Another massive IPO is also being prepared by Novorossiysk Commercial Sea Port, Russia’s largest commercial sea port operator, which could raise between $3.9 and $4.9 billion with a flotation in London of 20% of its shares. Novorossiysk is partially owned by Alexander Skorobogatko, a Kaliningrad duma member of the Liberal Democratic Party of Russia, and the state only retains a 20% stake. As just a casual observer, I would say that Novorossiysk probably has some strong growth potential as one of the main beneficiaries of increased maritime trade, including oil exports aboard tankers. London’s shares of IPOs may have cooled off in the fourth quarter, but it is good to see them improve in quality. Maybe some are finally beginning to realize that the best investments in Russia lie in the private sector, and that companies with heavy Kremlin participation or owners that are excessively close to the government bear a higher risk premium.