More than 490 companies went public in the United States in 2021, while only one company did so in Ukraine.
The Veres football club set a precedent when it started selling its shares to the public in April. Some saw it as a sign of revitalization of the archaic Ukraine stock exchange, while others scoffed at the deal, saying it would bring no profit to investors.
The process of raising funds through initial public offerings, or IPOs, is tedious and involves risk. Local companies rarely think about going public in Ukraine. They prefer to look for investors abroad, where there is more money and security.
Ukrainian investors, in turn, are reluctant to buy shares, as the country does not have an investment culture like in the United States, where more than half of the citizens own shares.
For local IPOs to become an investment tool with bonds and deposits, a lot has to change, experts said. First, businesses must be more transparent, while investing must be made simple and reliable. Most importantly, Ukrainian state-owned enterprises should bring benefits to their stakeholders; otherwise, investors will put their money elsewhere.
And it looks like the situation is starting to improve.
“It’s a matter of time before Ukrainian companies go public,” said Marina Mashkovskaya, CEO of brokerage firm Freedom Finance. “Overall, there is no better way to raise capital than a stock market.”
Fear of publicity
Ukraine has all the ingredients for successful IPOs: legislation, investors and stock exchanges to trade securities, says Sergii Moskvin, president of the Ukrainian Capital Markets Association. But, aside from Veres, few companies are willing to share their activities with stakeholders – it’s too “exotic” for them, Moskvin said.
Being public means that a company has to publish its financial statements and disclose the ownership structure to help people understand if it’s worth investing, he added.
In addition, state-owned enterprises should invite their stakeholders to make collective decisions about the future of the enterprise, which large Ukrainian enterprises, which usually belong to a single Übermensch, are reluctant to do so.
When speaking in public, many private companies avoid questions about their income or size and do not like to talk about their beneficiaries and owners. They say they fear unfair competition, but experts believe it is a way to hide corruption.
Instead of fundraising from the public, business owners prefer to use their own money, according to Moskvin. That is why Ukrainian investors have no choice but to invest in foreign companies.
“Our investors are used to trading on foreign stock exchanges where the company structure and the IPO process are simple and transparent,” said Olexandr Kulikov, director of Ukrainian investment company Univer.
Experts said companies potentially ready to go public include parcel delivery giant Nova Poshta, mobile operator Kyivstar, private hospital Dobrobut and wireless alarm maker Ajax.
So far, only Ajax have confirmed they want to go public but have said they will trade their shares in Europe or the United States.
Unfortunately for the Ukrainian stock exchange, even when local companies go public, they most likely do so abroad. Ukraine’s largest farm, MHP, and ore pellet producer Ferrexpo trade shares in London; agricultural giants Kernel, Ovostar, Milkland and Astarta sell securities on the Warsaw Stock Exchange.
Foreign stock exchanges are more prestigious, profitable and reliable. In addition, companies that trade shares abroad are better valued and attract more investors there, according to Olga Magaletska, head of the office of the National Investment Council of Ukraine.
Lack of interest
For investors in Ukraine, securities have never been a popular financial tool. First, because the offerings on the local stock exchanges were limited to privatized companies like Centrenergo, Ukrnafta and Turboatom which had a complicated structure and did not bring in much profit. Apart from that, there are safer ways to accumulate money in Ukraine, including bonds and deposits.
Deposits are the easiest way to earn extra money, Mashkovskaya said. While the yields are generally low, there is nothing to risk and fear other than bank insolvency. But even then, investors are guaranteed compensation of $ 7,000 from the state. Once extremely popular, deposits begin to lose momentum.
Over the past year, the annual deposit rate in banks has increased from 11% to 7.5%. People started looking for other investment tools, Ukrainian stock market expert Lyubomyr Ostapiv said.
More and more people are now turning to government bonds which are reliable and not subject to a 19.5% tax that Ukrainians have to pay on income from deposits, corporate bonds and stocks.
In 2020, the government bond market accounted for $ 11 billion, or 98%, of the total volume of trading on Ukrainian stock exchanges, while securities accounted for almost $ 21 million.
“Investors are conservative: they are moving from safer investment tools (like deposits) to riskier tools (like stocks),” said Maksym Libanov, commissioner at the Ukrainian National Securities and Market Commission. scholarship holder.
Financial analysts predict that the next step between government bonds and securities are corporate bonds issued by local companies.
In 2020, Nova Poshta issued corporate bonds worth $ 21 million with a yield of 16%, while leasing company Eska Capital issued bonds worth 3.6. million dollars with an annual return of 17%.
Compared to other investment tools, IPOs are riskier and more complicated, but they can generate higher profits in the future, according to Mashkovskaya.
The history of the Ukrainian stock exchange began with massive privatization in the 1990s, when ordinary Ukrainians could invest in state-owned enterprises.
“This idea didn’t work because the Ukrainians didn’t know what to do with their actions,” Libanov said.
Today, IPOs of state-owned companies can boost the Ukrainian stock market as the new generation of investors are ready to invest and the government is eager to help. “Thanks to the state’s IPOs, the government can show that this tool is simple and reliable,” Mashkovskaya said.
Ukrainian companies preparing for privatization include PrivatBank, Oschadbank, Ukrgazbank and Ukreximbank, which account for over 54% of the banking sector.
“The IPO of PrivatBank with its 300,000 clients could improve the investment culture in Ukraine,” Ostapiv said.
Other state-owned enterprises that can go public include Ukrainian postal operator Ukrposhta and rail monopoly Ukrzaliznytsia, according to Moskvin.
But experts don’t believe that will happen in the near future: these companies are mired in scandals, losing money, and having management problems. In March, the Cabinet of Ministers sacked Ukrzaliznytsia CEO Volodymyr Zhmak for lobbying the interests of oligarch Rinat Akhmetov, while Ukrposta CEO Igor Smelyansky constantly argues with the government over how to run your business.
“Even if the state takes measures for IPOs, the market will not accept it due to corporate governance issues in state-owned companies,” Libanov said.
To change this, Ukraine has set up a $ 3.6 million investment fund that will help state-owned enterprises go public and improve their corporate governance.
The main objective of the fund is to show local and foreign investors that investing in Ukrainian state-owned enterprises is simple and profitable, Magaletska said.
According to her, the IPOs will improve Ukraine’s investment climate and the country’s position in the Doing Business ranking, while increasing the confidence of international partners.
State-owned companies will also make the Ukrainian market more transparent and efficient, according to Kulikov. For companies, it is the opportunity to grow their businesses and accumulate capital, while for investors, IPOs are the additional source of income, Ostapiv said.
And the first thing Ukrainian companies can do to go public is just to start the movement, according to Mashkovskaya. “The longer we delay IPOs, the slower we develop our stock market,” she said. ·