by Bailey McCann
The Moscow Exchange or MICEX began trading shares on its own platform on Friday launching the largest and most successful IPO in the country since the 2008 crisis. The exchange raised 15 billion rubles ($498m), with shares priced at 55 rubles each - or the lowest end of its target range. Despite the lower share price, the offering was oversubscribed and marks an important step toward building the country's capital markets, and its overall move toward a more capitalist economy.
"We think Moscow Exchange is critical to the development of the Russian capital markets through growth in trading volume and liquidity," says Sean Glodek, Director, Russian Direct Investment Fund, one of the earliest investors in MICEX. The fund was also involved in the IPO.
The Russian Direct Investment Fund (RDIF) is a $10 billion fund established by the Russian government to make equity investments primarily in the Russian economy. The fund, which is in essence, the first sovereign wealth fund that functions as a private equity fund, invested $80m in the IPO, and brought in $200m in additional foreign investments including China's sovereign wealth fund, China Investment Corporation, which RDIF maintains a co-investment fund with.
The exchange is a key focal point in President Vladimir Putin's plan to make Moscow a financial center. The IPO placement itself was done locally in an effort to keep the focus on investing in and on the Russian exchange. Putin has set a goal of $10bn in Russian privatizations by the end of 2013.
RDIF is backed by the Kremlin, and as Opalesque previously reported, was an early investor in the exchange. "We started with MICEX-RTS one year ago, we came in as a pre-IPO investor and teamed with Cartesian Capital, BlackRock, CIC and EBRD (European Bank of Reconstruction and Development) in three investment rounds in 2012," Glodek says. With the offering RDIF increased its holding from 2.8 to 4.5%.
Credit Suisse, J.P. Morgan, Sberbank CIB and VTB Capital acted as joint global coordinators and joint bookrunners of the offering. Deutsche Bank, Goldman Sachs International, Morgan Stanley, Renaissance Capital and UBS Investment Bank also acted as joint bookrunners.
The exchange company recently announced that it will offer a dividend on its shares, which will benefit investors over the long term as the payout ratio will steadily increase to 50%.
The often choppy fortunes of Russian companies have made the MICEX one of the more volatile exchanges. However, Glodek notes that as far as investment in the exchanges space goes overall, MICEX presents a good value, "longer term we see significant future value in this as a stock. There is significant growth potential in Russia as one of the largest emerging markets globally, and the Exchange will be able to outperform exchanges in more developed economies, which have the growth phase behind them."
He points to additional reforms like Putin's initiatives to make Moscow a financial hub as well as pension reform, which, once completed will incentivize Russia's institutions to more freely invest in equities on the exchange. On the technology side, the exchange will also be migrating to a faster T+2 settlement structure by the end of 2013.
Other companies are also introducing support for the exchange. QuantHouse, S&P Capital IQ's Real Time operation has partnered with the European arm of leading Russian financial institution BCS Financial Group to launch low latency market data for MICEX. In addition, BCS is leveraging its trading infrastructure and advanced algo-trading development tools. The companies cite established and long-term demand among European buy-side firms, for access to the Russian market.
RFID also has plans to be part of other Russian IPOs downstream, "We are exploring potential opportunities in investing in some other companies planning to go public on the Moscow Exchange. We are working with Franklin Templeton, BlackRock and Goldman Sachs on some of those pre-IPO opportunities," Glodek says.
Beyond IPOs, RFID has plans to continue increasing its activities throughout the year according to Glodek, "More people are now aware of the Fund and for 2013, that's very exciting for our core business of co-investments with foreign investors in Russia. We are getting a lot of interest from outside investors and this year is on target to be very good for us."
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.