Creation of $42 million NIF fund signals 1999 rebirth
The venture capital fund is hoping to plumb the NIFs when the market for their shares is at an all-time low. Share certificates covering the 15 NIFs were trading at about zl. 70 last week, a more than two-year low.
"It is a well-timed investment," said Neil Balfour, non-executive chairman of Copernicus and non-executive director of the fund, called NIF Fund Holdings. "Just before the NIF program is fully privatized."
At the end of this year, all shares in the Mass Privatization Program (MPP) must be converted into shares in each of the 15 NIFs that were created to manage the privatization of 512 small and medium-sized companies. This conversion will reduce the Treasury Ministry's holding in each NIF to 15%, and investors hope will spur more active interest in the program.
Although NIF shares have performed woefully since they were listed on the Warsaw Stock Exchange (WSE) in June 1997, Copernicus may be getting in the game just as things are about to hot up, analysts said.
"Investors who buy NIFs now will certainly make profits in the long term," said Maciej Wiewiorski, an analyst at Wood & Co. "The prices are unbelievably low, even considering the fact that many portfolio companies are in poor condition."
He believes that Copernicus will be just one of a number of investors racing to buy NIF shares before the end of the year. "Many foreign funds have money to spare and look at the NIF market as very attractive," Wiewiorski said. "Some buy at a price above a fund's net asset value."
Balfour said that since closing the fund Sept. 9, NIF Fund Holdings has invested about $30 million of its assets into NIF shares and MPP share certificates. This meant the fund was bottom fishing for NIF assets, buying shares as they dropped from zl. 88 in early September to a low point of zl. 52 Oct. 19.
Since then, the shares have regained some life, but last week were down nearly 50% from their November 1997 value.
Investors that have been convinced by Copernicus' pro-NIF attitude include Bank Handlowy and international hedge fund Elliott Associates. "Most investors are institutional hedge funds from the U.K. and the U.S.," said Balfour. "We offer them more leverage than if they invested by themselves."
An increasing number of investment houses are taking a similarly bullish view toward the NIFs. In an in-depth report published Oct. 21 and called "Time to Wake Up!" Merrill Lynch said the end of 1998 would mark a watershed for the NIF program as the role of the Treasury Ministry diminishes, and institutional investors begin to call the shots.
Sean Murphy, an analyst at Nomura International who has had a "buy" recommendation for NIFs since June, believes the shares could be well suited for institutional investors who can find real asset value in the opaque program. Until now retail investors have dominated the market.
"It is now becoming clear what mechanisms are taking place that will unlock the asset value," Murphy said. He also said that after the ministry's presence is reduced in the program and responsibility is shifted to shareholders, they will be taking active, aggressive measures to deliver value for investors. "The passive, politically driven managing will end," Murphy said.
Managers of the 15 funds also believe 1999 will be a big year for the program.
Jerzy Drygalski, president of PTP-Kleinwort Benson, which manages NIF No. 5 Victoria, said that next year legal restrictions on the funds will be relaxed. "Funds will be able to buy out their own shares, purchase more shares in the companies in which they have dominant, 33% stakes," he said. "Shareholders will be more active, and they will have more influence on the strategy."
Drygalski said fund managers were anxiously awaiting the changes. "We would like to know what the shareholders' preferences are," he said. "From the fund's point of view, the changes will be beneficial."
However, not every investor is confident that the NIF market offers such a great opportunity for institutional investors.
"I believe investing in NIFs is a sensible thing to do, but it is not a simple operation on the market for a fund," said Jacek Siwicki, executive vice president of Enterprise Investors, which manages four funds in Poland with assets of $505 million. "We do not plan to do it.
"The question is whether there is enough liquidity on the market, whether there is a possibility to buy," he added. "The volume of trading is too small for an institution that seriously would like to enter this market."
But Murphy said the market's liquidity should increase. "The number of players is very small, and it is obvious that retailers are selling, so there is an ability to buy lots of shares," he said.
Copernicus' NIF fund is expected to have a life span of three years, which could be extended, and will invest in individual NIF shares and MPP share certificates, Balfour said. "In a small number of them," he added. "There will be a reasonable spread of investment but not in all 15 NIFs."
Balfour would not identify the NIFs in which the fund is investing. But he said the fund prefers NIFs with low levels of borrowing, strong cash positions and which are not dominated by a bank shareholder.
"We have done a fairly detailed analysis of underlying assets, and some of them are very valuable," Balfour said. "We will concentrate on these."
He also said the fund's strategy did not call for actively managing any NIFs. "We will support good managers but do not wish to participate in the management of any NIFs," Balfour said.
"It is a well-timed investment," said Neil Balfour, non-executive chairman of Copernicus and non-executive director of the fund, called NIF Fund Holdings. "Just before the NIF program is fully privatized."
At the end of this year, all shares in the Mass Privatization Program (MPP) must be converted into shares in each of the 15 NIFs that were created to manage the privatization of 512 small and medium-sized companies. This conversion will reduce the Treasury Ministry's holding in each NIF to 15%, and investors hope will spur more active interest in the program.
Although NIF shares have performed woefully since they were listed on the Warsaw Stock Exchange (WSE) in June 1997, Copernicus may be getting in the game just as things are about to hot up, analysts said.
"Investors who buy NIFs now will certainly make profits in the long term," said Maciej Wiewiorski, an analyst at Wood & Co. "The prices are unbelievably low, even considering the fact that many portfolio companies are in poor condition."
He believes that Copernicus will be just one of a number of investors racing to buy NIF shares before the end of the year. "Many foreign funds have money to spare and look at the NIF market as very attractive," Wiewiorski said. "Some buy at a price above a fund's net asset value."
Balfour said that since closing the fund Sept. 9, NIF Fund Holdings has invested about $30 million of its assets into NIF shares and MPP share certificates. This meant the fund was bottom fishing for NIF assets, buying shares as they dropped from zl. 88 in early September to a low point of zl. 52 Oct. 19.
Since then, the shares have regained some life, but last week were down nearly 50% from their November 1997 value.
Investors that have been convinced by Copernicus' pro-NIF attitude include Bank Handlowy and international hedge fund Elliott Associates. "Most investors are institutional hedge funds from the U.K. and the U.S.," said Balfour. "We offer them more leverage than if they invested by themselves."
An increasing number of investment houses are taking a similarly bullish view toward the NIFs. In an in-depth report published Oct. 21 and called "Time to Wake Up!" Merrill Lynch said the end of 1998 would mark a watershed for the NIF program as the role of the Treasury Ministry diminishes, and institutional investors begin to call the shots.
Sean Murphy, an analyst at Nomura International who has had a "buy" recommendation for NIFs since June, believes the shares could be well suited for institutional investors who can find real asset value in the opaque program. Until now retail investors have dominated the market.
"It is now becoming clear what mechanisms are taking place that will unlock the asset value," Murphy said. He also said that after the ministry's presence is reduced in the program and responsibility is shifted to shareholders, they will be taking active, aggressive measures to deliver value for investors. "The passive, politically driven managing will end," Murphy said.
Managers of the 15 funds also believe 1999 will be a big year for the program.
Jerzy Drygalski, president of PTP-Kleinwort Benson, which manages NIF No. 5 Victoria, said that next year legal restrictions on the funds will be relaxed. "Funds will be able to buy out their own shares, purchase more shares in the companies in which they have dominant, 33% stakes," he said. "Shareholders will be more active, and they will have more influence on the strategy."
Drygalski said fund managers were anxiously awaiting the changes. "We would like to know what the shareholders' preferences are," he said. "From the fund's point of view, the changes will be beneficial."
However, not every investor is confident that the NIF market offers such a great opportunity for institutional investors.
"I believe investing in NIFs is a sensible thing to do, but it is not a simple operation on the market for a fund," said Jacek Siwicki, executive vice president of Enterprise Investors, which manages four funds in Poland with assets of $505 million. "We do not plan to do it.
"The question is whether there is enough liquidity on the market, whether there is a possibility to buy," he added. "The volume of trading is too small for an institution that seriously would like to enter this market."
But Murphy said the market's liquidity should increase. "The number of players is very small, and it is obvious that retailers are selling, so there is an ability to buy lots of shares," he said.
Copernicus' NIF fund is expected to have a life span of three years, which could be extended, and will invest in individual NIF shares and MPP share certificates, Balfour said. "In a small number of them," he added. "There will be a reasonable spread of investment but not in all 15 NIFs."
Balfour would not identify the NIFs in which the fund is investing. But he said the fund prefers NIFs with low levels of borrowing, strong cash positions and which are not dominated by a bank shareholder.
"We have done a fairly detailed analysis of underlying assets, and some of them are very valuable," Balfour said. "We will concentrate on these."
He also said the fund's strategy did not call for actively managing any NIFs. "We will support good managers but do not wish to participate in the management of any NIFs," Balfour said.
