With equity, private crowds out public

  • 2003-10-23
  • By Gary Peach
RIGA - At first glance the results are impressive. The Baltic Index of 15 blue chip stocks has soared 67 percent this year, and daily turnover in September was twice what the average was for 2002. The combined market capitalization of Estonian, Latvian an

After several lackluster years, Baltic equities -- buoyed by low interest rates and consumers' spending binge -- have finally taken off. New investors have arrived, and they are bringing with them long-term financial resources. The emergence of numerous private pension funds and mutual funds are evidence that equity markets have undergone a qualitative change.
On closer analysis, however, the results are somewhat flimsy. Some 80 percent of blue chip equity trading this year has taken place in Estonia. And considering that the market is dominated by Hansapank and Eesti Telekom, that means 70 percent of Baltic List equity trading in the three Baltic states has come on two stocks only.
The Latvian market has seen its fortunes plummet, as turnover has sunk dramatically this year. There's just nothing there to get excited about.
And if we look more broadly, we see that in terms of market saturation the Baltic markets are a light-year behind their Nordic neighbors, with whom they are most integrated.
The per capita market capitalization of the three countries is around 1,000 euros.
But in Finland -- which has a population of just over 5 million and as of September boasted a market cap of 146 billion euros -- that number is 29,200 euros.
Baltic markets seriously lack depth. "The equity market is still thin. Most activity is concentrated in private equity deals," says Uldis Cerps, head of Latvia's Capital Markets and Finance Commission.
Worse, he says that there is unlikely to be a strong push for equity finance in the near future.
"The fundamental pattern of financing will not change over the next year. Debt finance is still very good - especially for big companies. There is very strong competition from banks for financial opportunities," says Cerps.
Foreign investors agree. "Equity markets are of peripheral importance right now," says James Oates, founder and managing director of Convergence Capital, a London-based asset management company. Private equity is currently the financial opportunity of choice, he says.
Indeed, the recent limited share issue by Parex Bank, the Baltics' largest financial institution in terms of assets, is indicative of the trend. Rather than going straight to the public where they may have received a better price, the bank's two owners conducted a limited offering to a select group of investors, both foreign and Latvian.
On the supply side, Sweden-based Askembla Asset Management announced in September it was increasing capital of its private equity fund to 63 million euros and that another injection of 17 million euros was expected before the end of the year.
The bottom line: the best way to gain exposure to the Baltic boom is through private equity.
But no trend lasts forever. Eventually the lending cycle will taper off, and borrowers will wake up one day and find that their debt-to-equity ratios are skewed and that it is time to issue more stock.
Thus for many institutional and private investors the key is to position themselves now for the surge of stock market activity that is bound to occur later.
Peter Elam Hakansson, head of asset management at Stockholm-based East Capital, says he is not losing hope for a rush of new listings and IPOs.
The main problem right now, he explains, is the low interest rates and the booming real estate market. But once these two areas fall off their current peaks, the Baltics could be in for an equity boom.
"There will definitely be more coming to market. It's a question of time, really," says Hakansson, whose East Capital Baltic Fund has risen over 60 percent so far this year.
The Baltic markets are dominated by local players, he says, though more and more foreigners are discovering them thanks to their future membership in the European Union.
To be sure, in recent weeks the news wires have been filled with announcements of new institutional investors getting established in the Baltics. Cerps says that both pension funds - first and second tier - and mutual funds are seeing "very healthy growth" this year.