Tuesday, January 25, 2011

Romania fund is ‘a shot of adrenaline’

By Chris Bryant in Vienna
Published: January 24 2011 
The Financial Times

Potential foreign investors in Romania, one of the European Union’s poorest countries, have often been frustrated by its comparatively underdeveloped capital market, weak corporate governance and slow pace of privatisation.

Mark Möbius, executive chairman of Templeton Emerging Markets Group, hopes to change that with the listing on the Bucharest stock exchange on Tuesday of Fondul Proprietatea – south-east Europe’s largest property restitution fund.

Romania’s government set up the €3.6bn closed-end fund in 2005 to compensate those whose property was confiscated during Communist rule.

Rather than award cash to victims, the state allotted claimants a share in a pool of 83 state-owned and formerly state-owned companies, most of them unlisted, and concentrated in the energy sector.

The fund’s key shareholdings include 10-20 per cent stakes in Petrom, Romania’s largest oil company, Romgaz, the natural gas producer, and Transelectrica and Transgaz, the power and gas transmission companies.

Franklin Templeton Investment Management took over the management of the fund in September last year in order to prepare to list it on January 25.

“You might call it a sovereign wealth fund for the country,” Mr Möbius told the Financial Times. “It’s a tremendous responsibility for us, not just to the country but to people who have been waiting years and years for compensation”.

The listing comes at a pivotal moment for Romania, a recipient in 2009 of a €20bn ($27bn) bail-out from the International Monetary Fund.

The country is struggling to pull out of recession due to some of the continent’s toughest austerity measures. The government has recently faced a succession of no-confidence votes that have added to market uncertainty.

Analysts say Fondul Proprietatea has the potential to provide a huge boost to the liquidity of the Bucharest stock exchange and thereby help attract new overseas institutional investors. Following the listing, the property fund will be the second-biggest company on the exchange by market capitalisation and is expected to increase the stock market’s overall free float by 81 per cent.

“There’s no question – this is going to be a shot of adrenaline to the system,” says Mr Möbius.

The government holds 39 per cent of the fund, having steadily cut its ownership. As a result approximately 5,200 individuals now control about 42 per cent of the share capital. The state’s holding is expected to fall below 33 per cent this year, after which it will effectively cede control of the fund.

Templeton plans to sell off smaller, unprofitable parts of the portfolio and shake up transparency and corporate governance at the remaining companies.

“These are companies where there is potential for increasing profitability and efficiency under a capable portfolio manager,” said Petar Atanasov, vice-president of the Balkan Advisory Company, a brokerage and investment manager.

Templeton has already assumed the role of activist investor by initiating legal action against the directors of Romgaz who approved a Lei 400m ($127m) “donation” to the state budget at the end of last year.

The fund manager has also successfully challenged a proposed restructuring of the country’s electricity sector, which threatens to combine valuable parts of its portfolio with less attractive assets.

“We’ve got to put people on notice at these companies ... Where something is wrong we have to take action in the interests of shareholders,” Mr Möbius explained.

These conflicts have underscored the risks for investors, whose interests may not always be aligned with those of the Romanian state.

Nevertheless, analyst reaction to the listing has been broadly positive, with the fund viewed as a proxy for the Romanian energy sector which has been difficult for financial investors to access in the past.

Due to the time it has taken for Fondul Proprietatea to come to market, many restitution claimants have sold their titles to private investors on the grey market at discounts of more than 60 per cent.

Templeton’s first task will therefore be to raise the stock price to the level of net asset value, which the investment manager has calculated at 1.11 lei per share.

No comments: