Municipal bonds, the next big thing?

by Aleksander Nowacki

After making little or no profit on its two investments to date, Capital Partners has switched to a purely consulting role, entering the difficult market for investment banking. It is a risky step for a small company with an unproven record, analysts say. In addition, however, to the three initial public offerings (IPOs) the company is working on, it is also eyeing a more esoteric market that may hold great promise for the future.

Paweł Bala, Capital Partners CEO and chief shareholder with a 50 percent stake, says the company would like to offer a comprehensive consulting service to municipalities, guiding them through the intricacies of the capital markets and assisting them in municipal bonds issues.

"It is a brilliant idea," says Leszek Milczarek, bonds analyst at CA-IB Investment Management. Milczarek explains that the prospect of European Union accession funds boosting local government revenues creates opportunities for innovative structuring of the products. This would allow for low-risk and potentially high returns on the investment. As municipal bonds are backed by treasury papers, they are less volatile than corporate bonds.

"There is a huge gap in the market," Milczarek enthuses. It is, however, precisely the lack of a developed market for municipal bonds that would initially cause difficulties for an entity attempting to initiate activity in this field. The lack of expertise on the part of local government institutions, and knowledge of such instruments among investors, could prove an obstacle difficult to overcome for a relatively small and little-known company. Once the market takes off, however, institutions that realize the potential early in the day could see juicy returns, Milczarek explains.

Bala says that he would like to send out offers of assistance to municipalities by the year's end, and possibly as soon as November. "We cannot afford a huge marketing campaign in the national media, but if we manage to interest a few municipalities, then we could go a long way."

For now, however, Capital Partners is gearing up for the less innovative - but no less risky - step of advising firms on IPOs.

The company is currently working on three projects in this field; the projects include two firms in the manufacturing sector and one offering medical services.

According to Bala, the decision to open an investment banking practice stems from the changed conditions on the public market. When Capital Partners entered the capital market by issuing bonds to the tune of zł.18 million, the stock market was in deep trouble and investors were looking for ways to mitigate risks. The two investments made on the strength of the bond issue, Telmax and Computer Service Support (CSS), returned a small loss and little profit respectively. Despite having two years to complete the projects, Capital Partners exited its investments after less then twelve months due, Bala says, to changes in the company's management.

Under the current market conditions, investors are more willing to make direct investments, and Capital Partners responded to this demand by switching to a purely consulting role. It is, however, a risky decision, and its success depends on a continuing upward trend on the WSE.