download the full version of the report
Deloitte surveys hundreds of opinion leaders on the challenges of IPO.
Facing the Expectations of Public Markets is a report published by Don’t go to London without Deloitte showing analysis of the results of its CIS-wide, C-level survey on IPOs.
The report shows how the expectations of IPO held by private business leaders differ from the real experiences of their listed peers. It compares opinions from 5 industry groups and 3 countries: Russia, Ukraine and Kazakhstan.
The survey was carried out in the period September-December 2007. It polled CEOs, CFOs and Chairs of companies either approaching, undergoing, or having completed IPOs.
C-level executives from hundreds of CIS companies participated.
For more information on the IPO Opinion Leaders Survey or to order a paper copy, please contact london@deloitte.ru
Executive summary
A new survey of CIS companies going to capital markets reveals how the expectations of pre-IPO firms differ from the experiences of their listed peers.
In December 2007 Deloitte took the pulse of pre-IPO and listed firms in the CIS, comparing both groups’ views on capital markets. This way analysts could gauge awareness among pre-IPO companies of what it meant to become a listed company. The survey asked why companies chose certain exchanges, how macroeconomics and politics influenced their IPO plans, and what the biggest obstacles to a listing were.
Over 100 companies took part from the manufacturing, consumer products, energy, resources, transport, real estate, technology, telecoms, media, and financial services industries. CEOs, CFOs, chairs and executive directors of companies from Russia, Ukraine and Kazakhstan answered the questions.
1. Response rate as an indication of market openness and experience
In Russia, survey respondents exhibited a deeper understanding of the issues under discussion, showing a higher general level of awareness about capital markets. The responses, however, were less forthcoming than in Kazakhstan and Ukraine, especially from the financial services industry, where it was difficult to find in-depth responses. This can probably be attributed to the current nervousness of the sector caused by the global liquidity crisis this summer and its ongoing repercussions. Banks are especially keen to postpone their judgment on the market situation or on investment decisions until year-end results, published in March 2008, reveal the full effects of the crisis on the sector.
Meanwhile, Ukrainian companies were keen to take part (to some extent this was because the liquidity crisis affected their IPO plans less) but responses to specific questions tended to be vague, showing a narrower understanding of the topic. Many of the Ukrainian respondents showed less clarity on the important factors affecting their fundraising plans compared to their Russian counterparts. In many cases, respondents had not given much thought to the available alternatives to IPO, or had underestimated the cost of going public on a particular exchange.
However, Ukrainian companies were generally open to discussing their plans and learning more about the process and implications of going public. Kazakh companies showed a positive attitude to the opportunities of raising capital and were keen to talk about their investment story. Respondents on the whole were very positive about what their businesses could offer to international investors. They were also keen to leverage off the prestige that an international IPO could bring.
Many Kazakh participants looked at an IPO as a tool for raising not only their profile abroad, but their reputation for transparency and good corporate governance. Achieving an improved reputation in the marketplace was considered by some as almost an automatic collateral benefit of going public.
This survey confirmed both our hopes and fears about IPO readiness in the CIS. Companies are ready to look at the options available to them for financing growth, and they are not wholly put off by recent market instability. However, many C-level executives are unsure about the best way to approach their growth or, indeed, where, when and how to list.
Most businesses have not entirely put off the idea of an IPO in light of recent market turmoil. Companies with IPO values less than USD 1bln are expected to get away despite the unfavorable market conditions. Issuers are postponing, not cancelling, their IPOs, due to current market conditions.
Companies approaching an IPO continue their long-term planning: preparing accountants’ reports for the listing prospectus, restructuring multiple legal entities and making the appropriate corporate governance arrangements. Some companies who would have considered bonds are likely to list equity now, especially where investment banks are unable to take on any more debt. We anticipate that the credit crunch could, in fact, lead companies to choose equity instruments as an alternative to bonds.
2. IPO challenges by industries
Companies are positive about the opportunities to raise capital on local exchanges, though many would ideally prefer an international IPO for the higher market visibility and benefits to their reputation. 69% of respondents across the CIS said they needed international (or a mix of international and local) investors to meet their funding needs. In the high-tech sector especially, international investors are sought for the stability and partnership they offer, while short-term local investments are also sought to ensure greater liquidity of the shares. The dual listing option (listing on a local exchange and issuing GDRs on the London Stock Exchange) is popular for CIS companies as it gives exposure to both long- and short-term investors.
The executives participated in the survey complained that Russian investors, unlike their Western counterparts, are not eager to invest in shares of retail, real estate, and transport businesses. Historically, Russian investors were focused on oil and mining companies, while foreign investors tended to see the great potential in other, newer sectors. But the past perception among CIS issuers’ that foreign investors had unlimited funds to place is now beginning to change.
3. International or local listing?
The cost of listing was cited by 55% of respondents as either the primary or secondary reason for choosing an exchange (timing and access to liquidity were also major factors). Although the LSE is the most popular international listing venue for CIS companies, it in fact has higher listing costs than other global exchanges and, in comparison to its European competitors, imposes more ongoing compliance costs upon issuers. This suggests that the psychological factor of going through the ‘London experience’ also has an effect on the issuer’s decision – though this was largely unrecognized by respondents.
For companies in the CIS, the time and cost of IPO preparation are major factors in deciding where to list, as well as the usual question of liquidity following their IPO. The total time and cost of a particular listing will depend on the requirements of the exchange chosen and the readiness of the company to float – in general, local or alternative markets (such as the LSE’s AIM or Hong Kong’s GEM) allow issuers to get to market quicker and are therefore popular with smaller CIS companies. As for the cost, experience shows that the international exchanges offering the lowest listing costs and ongoing fees are not necessarily the first choice for CIS issuers. This suggests that companies are either unaware of the real costs of going public, or are intuitively drawn along well-trodden paths to venues where CIS companies are already listed.
Despite the traditional attachment to London, we are now seeing some pioneering companies looking at listing venues in Asia and Europe - venues which have not previously attracted much interest from CIS issuers. Russian market players are also watching how the new St Petersburg Stock Exchange develops and, of course, are continuing to support the fast-growing local exchanges, MICEX and RTS.
Companies in Ukraine are less optimistic about local listings due to heavy restrictions imposed on the country's stock exchanges. Companies tend to look for alternative venues and are open to new options; many are now considering Warsaw, Frankfurt, Budapest or Vienna as an alternative to London.
The Kazakh stock exchange is similarly considered not yet liquid enough to support large flotations. However, a program to reform and consolidate the stock market is currently underway with the support of the government, which should improve its attractiveness.
4. Elections and IPOs
Parliamentary elections are not seen as a factor for decision-making on IPO. Presidential elections are described as a formality only. Companies say that, apart from politically-connected businesses, Presidential elections will only affect the timing of their IPO. Companies say they would not schedule an IPO close to the date of elections as these would distract the media from providing coverage of the deal. Analysts will probably mention elections in their reports without specifying their actual impact on recommendations.
IPOs in the forthcoming years
We are seeing the most active preparation for listings in the forthcoming year within the consumer, retail, real estate, energy and resources sectors. In the medium-term, we expect to see more banks and other financial services companies coming to market. At all stages of the pre-IPO preparation process it is important to meet the expectations of international investors. Deloitte introduces companies to global corporate governance best practices and help them meet the financial reporting requirements of their chosen exchange. The challenge of meeting investor expectations, as this survey has shown, is commonly underestimated by private companies – often to the detriment of the company’s valuation at the point of IPO. By better understanding the challenges of going to market, companies will be better prepared to face them and, in turn, will achieve the valuation that their business deserves.
