Over 490 companies went public in the U.S in 2021, while only one firm did in Ukraine.
Football club Veres set a precedent when it started selling its shares to the public in April. Some viewed it as a sign of revitalization of Ukraine’s archaic stock exchange, while others just made fun of the deal, saying it won’t bring investors any profit.
The process of raising money through initial public offerings, or IPOs, is tedious and entails risks. Local firms rarely even think about going public in Ukraine. They would rather look for investors abroad, where there’s more money and security.
Ukrainian investors, in turn, hesitate to buy shares, as the country doesn’t have an investment culture like in the U.S., where over half of citizens own stocks.
For local IPOs to become an investment tool along with bonds and deposits, many things have to change, experts said. First, the companies need to be more transparent, while investing should become simple and reliable. Most importantly, Ukrainian public companies should bring profit to their stakeholders; otherwise, investors will put their money elsewhere.
And it seems the situation is beginning to change for the better.
“It’s a matter of time before Ukrainian companies become public,” said Marina Mashkovskaya, CEO of brokerage company Freedom Finance Ukraine. “Globally, there is no better way to raise capital than a stock exchange.”
Fear of publicity
Ukraine has all the ingredients for successful IPOs: legislation, investors and stock exchanges to trade securities, according to Sergii Moskvin, President of the Ukrainian Capital Markets Association. But, apart from Veres, few companies are ready to share their business with stakeholders — it is too “exotic” for them, Moskvin said.
Being public means that a company has to publish its financial statements and disclose the structure of ownership to help people understand whether it’s worth investing in, he added.
Besides, public companies have to invite their stakeholders to make collective decisions about the future of the business — something that big Ukrainian businesses, which are usually owned by one Übermensch, are reluctant to do.
While speaking publicly, many private firms avoid questions about their income or size and don’t like to talk about their beneficiaries and owners. They say they fear unfair competition, but experts believe that it is a way to hide corruption.
Ukrainian soccer club Veres became the first-ever soccer club in Ukraine funded by fans rather than big businessmen or oligarchs. Starting April 12, everyone in Ukraine can buy at least one of 500,000 shares of Ukrainian soccer club Veres for $3.6 each. (Football club Veres)
Better abroad
Instead of raising money from the public, the companies’ owners prefer to use their own money, according to Moskvin. That’s why Ukrainian investors have no choice but to invest in foreign companies.
“Our investors are used to trading on foreign stock exchanges where the structure of companies and the process of IPO is simple and transparent,” said Olexandr Kulikov, director of the Ukrainian investment firm Univer.
Experts said that companies that are potentially ready to go public include parcel delivery giant Nova Poshta, mobile operator Kyivstar, private hospital Dobrobut, and wireless alarm maker Ajax.
For now, only Ajax has confirmed that it wants to go public but said it would trade its shares in Europe or the U.S.
Unfortunately for the Ukrainian stock exchange, even when local firms do go public, they most likely do it abroad. Ukraine’s largest agricultural holding MHP and ore pellet producer Ferrexpo trade their shares in London; agricultural giants Kernel, Ovostar, Milkland and Astarta sell securities on the Warsaw stock exchange.
Foreign stock markets are more prestigious, profitable and reliable. In addition, companies that trade shares abroad are valued higher and attract more investors there, according to Olga Magaletska, head of the office at Ukraine’s National Investment Council.
Lack of interest
For investors in Ukraine, securities have never been a popular financial tool. Firstly, because the offerings on the local stock exchanges were limited to privatized companies like Centrenergo, Ukrnafta and Turboatom that had a complicated structure and didn’t bring much profit to the table. Apart from that, there are safer ways to accumulate money in Ukraine, including bonds and deposits.
Deposits are the easiest way to get additional profit, experts said. Although the returns are usually low, there is nothing to risk and be afraid of, apart from bank’s insolvency. But even then, investors are guaranteed $7,000 of compensation from the state. Once hugely popular, deposits start losing momentum.
Over the past year, the annual deposit rate in banks has decreased from 11% to 7.5%. People have started to look for other investment tools, said Ukrainian stock market expert Lyubomyr Ostapiv.
More people now turn to government bonds that are reliable and don’t come with a 19.5% tax that Ukrainians have to pay for income from deposits, corporate bonds and shares.
In 2020 the government bond market accounted for $11 billion, or 98%, of the total volume of the trade on Ukrainian stock exchanges, while securities accounted for nearly $21 million.
“Investors are conservative: they go from more secure investment tools (like deposits) to riskier ones (like stocks),” said Maksym Libanov, commissioner at Ukraine’s National Commission on Securities and the Stock Market.
Financial analysts predict that the next step between government bonds and securities are corporate bonds issued by local businesses.
In 2020, Nova Poshta issued corporate bonds worth $21 million with a 16% yield, while leasing company Eska Capital issued bonds worth $3.6 million with a 17% annual yield.
Compared to other investment tools, IPOs are riskier, but they can bring higher profits in the future, according to experts.
Government involvement
The history of the Ukrainian stock exchange started from massive privatization in the 1990s when ordinary Ukrainians could invest in state-owned enterprises.
“This idea didn’t work because Ukrainians didn’t know what to do with their stocks,” according to Libanov.
Today, IPOs of state companies can give a boost to the Ukrainian stock market as the new generation of investors is ready to invest and the government is eager to help. “Through the state IPOs, the government can show this tool is simple and reliable,” Mashkovskaya said.
Ukrainian enterprises preparing for the privatization include the state-owned PrivatBank, Oschadbank, Ukrgazbank and Ukreximbank that represent over 54% of the banking sector.
“The IPO of PrivatBank with its 300,000 clients could improve the culture of investment in Ukraine,” Ostapiv said.
Among other state companies that can go public are Ukraine’s postal operator Ukrposhta and railway monopoly Ukrzaliznytsia, according to Moskvin.
But experts do not believe that it will happen in the near future: these companies are mired in scandals, lose money and have problems with management. In March, the Cabinet of Ministers fired Ukrzaliznytsia’s CEO Volodymyr Zhmak for lobbying oligarch Rinat Akhmetov’s interests, while Ukrposta’s CEO Igor Smelyansky is constantly arguing with the government about how to run his enterprise.
“Even if the state takes steps towards IPOs, the market will not accept it because of problems with corporate governance in state-owned companies,” Libanov said.
To change that, Ukraine set up a $3.6-million investment fund that will help state-owned enterprises go public and improve their corporate governance.
The main goal of the fund is to show local and foreign investors that investment in Ukraine’s state-owned firms is simple and profitable, Magaletska said.
According to her, IPOs will improve Ukraine’s investment climate and the country’s position in the Doing Business ranking, while increasing the trust of the international partners.
Public companies will also make the Ukrainian market more transparent and efficient, according to Kulikov. For companies, it is the opportunity to expand their business and accumulate capital, while for investors — IPOs are the additional revenue stream, Ostapiv said.
And the first thing Ukrainian businesses can do to become public is just to get the ball rolling, according to Mashkovskaya. “The longer we postpone IPOs, the slower we develop our stock market,” she said. ·
