Two years on, NIFs remain dismal investment vehicle
The 15 funds are today traded at an average of just 43.7% of their initial listing price.
Even those who believe the funds needed an adjustment period after being transformed into publicly traded funds cannot find much solace in their performance over the past 12 months.
Only two funds, Magna Polonia and Octava, managed to post positive returns. At the same time, the WSE's all-share WIG index was up 3%, while the NIFs on average lost 28.6% of their value. Although the funds have risen an average 6.6% since the start of 1999, they are still laggards. During the same period, the WIG rose 27.6%.
The hope for many NIF investors is that much-talked-about consolidation among the funds will eventually bring change. But for the moment, no one is expecting a quick rebound. "The NIFs might go up in the long run," said Paweł Sobkiewicz, head of the issues department at BGK brokerage. "But I do not expect their prices to go up in the near future."
That prognosis is another disappointment for those who believed that the start of 1999 would mark a new beginning for the NIFs. In January, the Treasury Ministry's stake in the funds was reduced and it was expected that new strategic shareholders would emerge and consolidation would unlock value.
"The consolidation process plus clarification of the shareholder structure of NIFs may help in their WSE valuation," said Piotr Konior, an analyst at Citibrokerage. "The consolidation process should improve the liquidity and capitalization of individual NIFs."
Konior said, though, that while that's what should happen, most investors aren't buying the story.
"It has been very difficult to convince investors to invest in NIFs," he added. "Of course there are investors who invest, but most of them are speculative investors betting on the ongoing NIF consolidation."
Such investors do not include foreign fund managers who have seemingly abandoned the program. That has contributed to the weakness of the funds' individual prices, analysts said.
The big question is why the program, which at one time seemed like a regional example of how to privatize hundreds of companies, has failed so miserably.
The NIFs were created as part of the Mass Privatization Program (MPP), which was an effort to privatize 512 small and medium-sized, state-owned companies. Under the program every adult Pole was entitled to purchase an MPP share certificate for zł. 20. These certificates represented one share in each of the 15 NIFs that managed a portfolio of companies in the program.
"In the beginning, the expectations were that the (certificates) could reach a price of zł. 200," Sobkiewicz said. "However, the maximum price was zł. 170 and then they fell below zł. 100."
"Everyone expected much better results," added Benita Mikołajewicz, an analyst at ING Barings Securities. "Comparison of the book value of the portfolio companies and the market price of the funds might have suggested that the funds were underpriced (when they were listed).
"It turned out, however, that the market was right," she said.
The structure of the program was a problem from the beginning for the funds. Every NIF had a 33% stake in about 15 companies that it would manage and a minority stake in every other company in the program. This made management difficult and analysis of companies' true value problematic. In addition, while fund managers were supposed to operate solely on market principles, the funds also had supervisory boards that were largely filled with political appointees.
Besides structure, analysts said that the companies included in the program didn't make the turnaround task facing funds any easier. "Most of the companies included in the program are small and weak, while the sectors they operate in are not very attractive," Konior said. "The best companies from the program have already been sold to foreign investors."
By the end of last year, only 253 companies of the 512 in the program had been privatized. Most of those, 133, were sold to strategic investors, and in 34 cases, a strategic investor acquired a share in a company but NIFs maintained a stake. The NIFs took 52 companies public, including 23 that were floated on the WSE and 13 on the over-the-counter market. In only 34 cases were companies liquidated or put into bankruptcy proceedings.
Ultimately, analysts said the failure of the funds lies with the fund managers who were supposed to make the companies they managed profitable. "The restructuring programs initiated by managing firms were not very effective," Mikołajewicz said.
This is why those who hold any hope for the NIFs are now hoping to see consolidation that will bring about more aggressive, open management.
"It seems that there will be two or three firms that will manage the funds," Sobkiewicz said. He added that possible consolidators include insurer Powszechny Zakład Ubezpieczeń (PZU), NIF Fund Holdings, Bank Pekao and to a lesser extent Wielkopolski Bank Kredytowy (WBK).
"There is also a group of investors, Radziwiłł's group, which is very active in this area," Sobkiewicz said.
This group consists of a number of overseas institutional investors, including Credit Suisse First Boston, Merrill Lynch, Poland Opportunity Fund and Everest Capital.
Everest Capital Polska is managing NIF Zachodni, Foksal and Kazimierz Wielki, while a consortium of BRE Bank and Cresco Management (which is representing Radziwiłł's group) is managing Fortuna. By the end of May, the consortium signed a contract with NIF Victoria, but the agreement has to be ratified at the fund's June 23 shareholders meeting. The contract with Fortuna must be accepted by its June 28 shareholders meeting.
PZU NFI Management manages Kwiatkowski and wants to become the managing firm for NIF No. 2 Progress and Hetman, in which PZU is the largest shareholder. Trinity Management, a consortium of Bank Pekao and Company Assistance, is managing NIF No. 3 and NIF No. 11, in which Bank Pekao is the dominant shareholder.
"Consolidation of the funds themselves should be the next logical step," Sobkiewicz said. "However, there is still no information on how this could be done."
Even those who believe the funds needed an adjustment period after being transformed into publicly traded funds cannot find much solace in their performance over the past 12 months.
Only two funds, Magna Polonia and Octava, managed to post positive returns. At the same time, the WSE's all-share WIG index was up 3%, while the NIFs on average lost 28.6% of their value. Although the funds have risen an average 6.6% since the start of 1999, they are still laggards. During the same period, the WIG rose 27.6%.
The hope for many NIF investors is that much-talked-about consolidation among the funds will eventually bring change. But for the moment, no one is expecting a quick rebound. "The NIFs might go up in the long run," said Paweł Sobkiewicz, head of the issues department at BGK brokerage. "But I do not expect their prices to go up in the near future."
That prognosis is another disappointment for those who believed that the start of 1999 would mark a new beginning for the NIFs. In January, the Treasury Ministry's stake in the funds was reduced and it was expected that new strategic shareholders would emerge and consolidation would unlock value.
"The consolidation process plus clarification of the shareholder structure of NIFs may help in their WSE valuation," said Piotr Konior, an analyst at Citibrokerage. "The consolidation process should improve the liquidity and capitalization of individual NIFs."
Konior said, though, that while that's what should happen, most investors aren't buying the story.
"It has been very difficult to convince investors to invest in NIFs," he added. "Of course there are investors who invest, but most of them are speculative investors betting on the ongoing NIF consolidation."
Such investors do not include foreign fund managers who have seemingly abandoned the program. That has contributed to the weakness of the funds' individual prices, analysts said.
The big question is why the program, which at one time seemed like a regional example of how to privatize hundreds of companies, has failed so miserably.
The NIFs were created as part of the Mass Privatization Program (MPP), which was an effort to privatize 512 small and medium-sized, state-owned companies. Under the program every adult Pole was entitled to purchase an MPP share certificate for zł. 20. These certificates represented one share in each of the 15 NIFs that managed a portfolio of companies in the program.
"In the beginning, the expectations were that the (certificates) could reach a price of zł. 200," Sobkiewicz said. "However, the maximum price was zł. 170 and then they fell below zł. 100."
"Everyone expected much better results," added Benita Mikołajewicz, an analyst at ING Barings Securities. "Comparison of the book value of the portfolio companies and the market price of the funds might have suggested that the funds were underpriced (when they were listed).
"It turned out, however, that the market was right," she said.
The structure of the program was a problem from the beginning for the funds. Every NIF had a 33% stake in about 15 companies that it would manage and a minority stake in every other company in the program. This made management difficult and analysis of companies' true value problematic. In addition, while fund managers were supposed to operate solely on market principles, the funds also had supervisory boards that were largely filled with political appointees.
Besides structure, analysts said that the companies included in the program didn't make the turnaround task facing funds any easier. "Most of the companies included in the program are small and weak, while the sectors they operate in are not very attractive," Konior said. "The best companies from the program have already been sold to foreign investors."
By the end of last year, only 253 companies of the 512 in the program had been privatized. Most of those, 133, were sold to strategic investors, and in 34 cases, a strategic investor acquired a share in a company but NIFs maintained a stake. The NIFs took 52 companies public, including 23 that were floated on the WSE and 13 on the over-the-counter market. In only 34 cases were companies liquidated or put into bankruptcy proceedings.
Ultimately, analysts said the failure of the funds lies with the fund managers who were supposed to make the companies they managed profitable. "The restructuring programs initiated by managing firms were not very effective," Mikołajewicz said.
This is why those who hold any hope for the NIFs are now hoping to see consolidation that will bring about more aggressive, open management.
"It seems that there will be two or three firms that will manage the funds," Sobkiewicz said. He added that possible consolidators include insurer Powszechny Zakład Ubezpieczeń (PZU), NIF Fund Holdings, Bank Pekao and to a lesser extent Wielkopolski Bank Kredytowy (WBK).
"There is also a group of investors, Radziwiłł's group, which is very active in this area," Sobkiewicz said.
This group consists of a number of overseas institutional investors, including Credit Suisse First Boston, Merrill Lynch, Poland Opportunity Fund and Everest Capital.
Everest Capital Polska is managing NIF Zachodni, Foksal and Kazimierz Wielki, while a consortium of BRE Bank and Cresco Management (which is representing Radziwiłł's group) is managing Fortuna. By the end of May, the consortium signed a contract with NIF Victoria, but the agreement has to be ratified at the fund's June 23 shareholders meeting. The contract with Fortuna must be accepted by its June 28 shareholders meeting.
PZU NFI Management manages Kwiatkowski and wants to become the managing firm for NIF No. 2 Progress and Hetman, in which PZU is the largest shareholder. Trinity Management, a consortium of Bank Pekao and Company Assistance, is managing NIF No. 3 and NIF No. 11, in which Bank Pekao is the dominant shareholder.
"Consolidation of the funds themselves should be the next logical step," Sobkiewicz said. "However, there is still no information on how this could be done."
