Investment Adventures in Emerging Markets

A Unique Offering in Bucharest, Romania

Mark with Greg
With Greg at the opening bell ceremony on the day Fondul was listed on the Bucharest Stock Exchange

Nearly four months ago, I wrote about the opening of our office in Bucharest to manage the mandate for Fondul Proprietatea (Fondul). If you remember, Fondul was established to compensate Romanians whose properties were confiscated by the former communist government. Since then, Grzegorz Konieczny, fund manager of Fondul, moved to Bucharest and has spearheaded the effort to list Fondul on the Bucharest Stock Exchange. I asked him to share his thoughts on Bucharest and what the listing means for shareholders and the Romanian market.

From Greg Konieczny

My first trip to Bucharest was in 1997. At that time, the city’s infrastructure was not in the best shape, very few people spoke English, and on the roads, the majority of cars I remember seeing were the domestically produced Dacia, named after the historic region that constitutes much of present-day Romania. However, I have since visited Bucharest many times and have seen considerable change taking place. The city’s infrastructure has improved significantly, with better roads and airports and a great choice of hotels and restaurants for visitors. The Dacia has now been edged out by luxury cars from all over the world—in fact, there appear to be more of those cars in Bucharest than in the capitals of other countries in the region. All these changes seem to indicate that Romanians are gradually benefiting from the arrival of a market economy in this former communist country.

To me, one of the clearest symbols of a market economy is the stock exchange. The Bucharest Stock Exchange (Bursa de Valori Bucureşti or BVB) was inaugurated in 1882, but it was closed when the communist regime took power after World War II. In 1995, the exchange reopened, listing only six companies and holding just one weekly trading session. Less than 10 years later, by the end of 2004, things had changed quite a bit—with more than 70 listed companies and regular daily trading, the market’s capitalization stood at US$12 billion, about 17% of Romania’s GDP. Unfortunately, this impressive start was not followed by additional listings of large state-controlled companies, and the BVB did not grow substantially thereafter. At the end of 2010, the BVB’s market capitalization was US$13.7 billion (about 8.5% of estimated 2010 GDP), not much higher than levels in 2004.[1]

In addition, like many other eastern European markets, the BVB was impacted by the effects of the global financial crisis in late 2008. Average daily trading volumes on the exchange, after peaking at US$22.7 million in 2007, decreased to US$6.9 million in 2010. Much of this decline might have been due to the reduced trading activity of foreign investors during this period, who went from representing about 37% of total traded volume on the BVB in 2007 to about 25% in 2010. Although the BVB is dominated by residents, foreign investors play an important part as trend setters.[2]

We believe listing a company on the BVB has many potential advantages for its shareholders, including price transparency for those trading the shares, potential for improved liquidity, and the possibility for both retail and institutional investors to invest within the safeguards of a regulated market environment. Investors may also benefit from improved disclosure procedures applicable to all listed companies.

The increased liquidity that is created by the listing of Fondul’s shares (adding more than 50% to the total free-float of the BVB) could attract larger institutional investors to Romania who have thus far stayed away from the market due to its smaller size. In our role as Fondul’s managers, we visited and talked to the management of companies held in the portfolio to understand their business and growth potential. As we see it, our primary goal is to help the companies in the portfolio reach their full potential and thus bring value to Fondul’s shareholders.

Working on improving Fondul’s value takes most of my time, from early morning until late in the night, but eventually I hope to enjoy and appreciate more of Bucharest, the city I now call home. So far, my jogs have taken me through the surroundings of Herăstrău and its lake, which are very beautiful, so it’s a promising start. I look forward to discovering more about this country, its companies and its people.

[1] Source: Bucharest Stock Exchange

[2] Source for all data in the paragraph: Bucharest Stock Exchange

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