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Perfect timing for access to Romania

More IPOs are on the cards, Grzegorz Konieczny tells Leonora Walters
May 6, 2015

Last week saw the listing of what will be one of the largest investment companies on the London Stock Exchange. Fondul Proprietatea's (FP.) €2.9bn assets comprise listed and unlisted companies in Romania. The fund was set up in 2005 to compensate Romanians whose properties were seized during the communist regime, and in 2011 it listed on the Bucharest Stock Exchange. It is invested in some of the largest listed companies in Romania, but unlisted assets - including state-owned infrastructure - account for more than half its assets. However, its manager, Grzegorz Konieczny of Franklin Templeton, wants to change this.

"One of our key objectives since taking over the fund's management in 2010 has been to reduce our unlisted holdings as much as possible, by selling some and doing initial public offerings (IPO)," he says.

A number of the fund's holdings have already undertaken IPOs, including Romania's largest gas producer, Romgaz, in November 2013, and 17 of the 53 companies in its portfolio - representing nearly 48 per cent of assets - are now listed.

Next up is the fund's second largest holding Hidroelectrica (17 per cent of assets) which focuses on hydro electricity generation. This should list in Bucharest and London in 2016. Mr Konieczny also hopes to list Bucharest Airports, Constanta Port and national salt company Salrom, which operates mines, as well as a number of electricity and gas distribution companies of which the controlling stakes are held by foreign energy companies, including Germany's E.ON, Italy's Enel and Gaz de France.

"When they list we could stay as a shareholder, exit completely or reduce the holding," he says. "The pricing will largely determine this, as well as what other investment opportunities we have at the time."

The fund is heavily allocated to oil and gas - the sector currently accounts for more than 40 per cent of assets. Due to the fall in the oil price, shares in some of these companies have experienced substantial falls, which have been detrimental to Fondul's net asset value (NAV). However, Mr Konieczny says companies such as Romgaz have potential: "Its cash flows are growing and its profitability is in contrast to the global trend because it has benefited from the liberalisation of gas prices in Romania. Last year profits were at a record high."

But he hopes to diversify the portfolio once Fondul's discount to NAV has been brought in and he can start making new investments, for example in the healthcare and consumer sectors. "The valuations of Romanian companies are low compared with surrounding countries and we see this as the perfect timing for investors to access Romania, given that it trades at one of the lowest price-earnings ratios and offers a high dividend yield compared with other countries in central and eastern Europe," he says.

As of March 2015 the price-earnings (PE) ratio for the BET Index Romania was 9.9, compared with 10.1 for the XU100 Index in Turkey, 14.4 for Poland's WIG Index and 13.6 for Hungary's BUX Index.

"Our preference is for listed investments as having unlisted companies in the portfolio usually results in a higher discount to NAV, and we want to make the portfolio more liquid," he adds. "And any new investments can only be justified if they exceed the returns we can make from share buybacks. But we will also consider pre-IPO companies."

Grzegorz Konieczny CV

Grzegorz Konieczny has been portfolio manager of Fondul Proprietatea since September 2010, and also has research and portfolio management responsibilities in central and eastern Europe at Franklin Templeton Investment Management. He has worked at Franklin Templeton since 1995.

Before this he was director of capital market transactions at Bank Gdansk in Poland.

Mr Konieczny has a masters degree in economics and foreign trade from the University of Gdansk, and in 1994 he obtained an investment adviser licence from the Polish Securities and Exchange Commission.

Single country funds are high-risk, especially those focused on less developed frontier markets such as Romania, so why should UK investors allocate there?

"We believe the Romanian economy can continue to grow at a similar or even higher pace than the 2.8 per cent increase in gross domestic product (GDP) seen in 2014," says Mr Konieczny. "A new loan agreement with the International Monetary Fund should also aid economic growth by increasing financial stability, while at the same time providing oversight with regard to the implementation of structural reforms.

And the low correlations between developed markets and Romania, which is a Frontier Market country, indicates diversification benefits for both short and long-term investors."

He adds that the fund has a decent record on annual distributions. In 2013 and 2014 it paid dividends of 0.05 Romanian Lei per share, up from 0.04 for 2012. Mr Konieczny says the fund should be able to at least maintain dividends at the same level and there is the potential for further increases.

"We look to pass on all the dividends received from portfolio companies, less operating costs," he says. "We have been able to cut the discount by working on the portfolio and its holdings, and by corporate actions such as increasing the annual distribution, doing share buybacks and tender offers, and establishing proper shareholder relations."

The fund trades at a discount to NAV of around 24 per cent, in contrast to 2011 when it was on more than 55 per cent, and the share price increased about 71 per cent since it listed in 2011.

One of the aims of the London listing is to tighten the discount further by making the fund more widely available to international investors. More than half of investors are already foreign institutions, the largest being US hedge fund Elliott Associates, best known in the UK for its recent action on Alliance Trust (ATST).

Fondul Proprietatea was supposed to list in London in November 2014 but didn't get approval from the Romanian regulator to do so. But since then the Romanian authorities have allowed a couple of other companies to list in London via global depositary receipts, paving the way for Fondul.