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YP: The two deals were unusual for the Russian market as they were amongst the smallest widely marketed IPO trans- actions from Russia maybe ever.
BA: Is that what investors are inter- ested in now? Smaller companies?
Alexey Kletenkov: They were marketed the same way as many mid- or large- sized Russian transactions. Foreign investors – portfolio investors – remain the backbone of any offering. And they are the main price drivers.
BA: But is there a problem with the ticket size? International investors typically want a rather large ticket size to make an investment worth their while and these are mid-cap companies.
AK: Every investor has their own demands and expectations of the market liquidity and the ticket size. Obviously not every investor will participate, but overall the level of interest was absolute- ly acceptable and helped achieve good levels of diversification in the book.
BA: The share offers and the par- ticipation of foreign investors doesn't match with the Russia story being sold in the West focusing on Putin, Donbas, Crimea, sanctions, the hacking of the US election and so on. A divide seems to have opened up again between the negative press coverage and the rela- tively rosy view investors have of the money to be made there.
YP: Macroeconomic and political fac- tors you mentioned are not irrelevant. Actually they are very important – sanc- tions, political volatility, the oil price have clearly been driving the market to a great extent. But investors ask a very simple question: whether or not they can make returns and if the risks are acceptable.
BA: In the short-term one of the main risks we are facing is the threat of new sanctions being imposed by America, specifically financial sanctions and the possibility of including a ban on buying the OFZ, the Russian treasury bonds, that may happen at the end of January.
YP: It is very hard to predict anything in this volatile environment, but what we do know is there is a very strong pipeline of healthy growing companies out of Russia looking to go into the market. We see a lot of companies well prepared for
or the worst, and last year it was the worst, returning almost nothing.
AK: In the last two weeks [in January 2018] there were record highs in weekly funding flows in Russian equities and
“There is a very strong pipeline of healthy growing companies out of Russia looking to go into the market”
a transaction, with a good equity story, with owners that are motivated to go into the public market at different sizes – small companies, large companies.
BA: Are you going to be involved in new IPOs?
YP: We hope so. We can’t give away the names but we have seen interest from various companies in various sectors. What we hear from investors is they are very much interested in mid-sized qual- ity stories with some domestic angle, but not necessarily. So I think we will see
a very healthy mix of companies going into the market.
BA: Because life goes on. The econ- omy is growing albeit modestly and companies are growing. They need capital to develop.
AK: Exactly. And it is important to mention that there has been a tangible undersupply of Russian equity offerings in the past years counting from the end of 2013 to the beginning of last year when Detsky Mir reopened the market for widely internationally marketed IPOs. There is a wide range of portfo-
lio investors that used to be investors
in Russian IPOs before 2014. These investors are still there. The portfolio managers are still there. They are always looking for interesting new stories. And that very often lies in sectors that are far away from commodities.
BA: Emerging markets just had a great year with the MSCI EM index up some 32%. Russia is classically always the best performing market in the world
Russian bonds for the last three or four years. That doesn't mean that it will con- tinue throughout the year. It only means that some investors who are interested in holding a wider range of stocks and benchmarking against the indices are seeing more inflows.
But there are also active managers and they are happy to take Russian risks and actively manage them. And these are key for the new equity deals as they are look- ing to diversify their portfolio and buy the right stock at the right time.
YP: What is also important is not just good corporate governance but the mar- ket infrastructure. What we have seen is that most IPOs are happening on MOEX, which has reached a stage when most
of the international investors looking
at Russian stocks are very happy to buy locally listed shares.
We have a very good dialogue with MOEX and they are now very much focusing on widening Russian public markets to a broader range of investors and to Russian retail and smaller funds.
BA: You have mentioned Russian retail investors twice. The number of indi- vidual accounts opened at MOEX has shot up and retail investment seems to have taken off.
YP: We see there is a growing interest by retail investors and the inflow of funds. The reason is quite straightfor- ward: deposit rates have fallen very low and the public markets gave you access to much higher returns until
a few years ago.
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