One of the characteristics of the Romanian business community is a focus on debt capital at the expense of equity capital. This may be seen as primarily an after-effect of the post-communist context where capital was scarce, foreign investors cognisant of political instability and companies primarily focused on the domestic market. With less incentive to go public and fewer expansion plans in need of financing, the stock exchange drew fewer companies, which lowered incentives further and so forth. As that context subsided, the era of quantitative easing began and debt capital gained relative prominence for many companies, Romanian and otherwise.
Consequently, equity markets remained quite underdeveloped relative to the country’s economy, perhaps most starkly shown by UiPath’s straight jump to the NYSE but seen quite generally. For example, the market capitalisation for Romanian companies as a percentage of GDP stood at 10.1% in 2020, while comparative figures for Poland and the United Kingdom were 29.8% and 115%. France, hardly a model of expansive, equity-driven Darwinian capitalism, stood at 84%. Much of that may reflect a domestic focus, but it would be well within bounds to suggest that the Romanian capital market has room to grow.
That may be coming: the benefits of a wider and more diversified pool of capital are self-evident to most established Romanian businesses, many Romanian companies have fairly healthy growth rates, and foreign capital has little incentive to avoid a growth market which is relatively stable by current standards.
The Romanian IPO Potential
Many Romanian companies would have valuable equity to offer and potentially profitable uses for financial capital. Getting there, however, first implies going through the IPO process. It can be a process of daunting complexity, but many companies might not find it as difficult as some might think.
Mostly, these are well established companies, with clear track-records, with accounting departments which already run things close to public company standards even without disclosures, well-staffed legal departments, and a pool of capital – financial, relational, social – which your typical IPO does not have. In other words, the genuinely structural hurdles have often been overcome already.
Communication, Strategic and Otherwise
What remains besides the voluminous but fairly standard paperwork is communicating all of this to market participants. That, in turn, is less a matter of ticking boxes, but requires the entirety of management coming together to make it a success.
Roughly, we may split communication strategies, as management itself, into three levels: 1) operational; 2) tactical; and 3) strategic.
Operational communication deals with the critical details, potentially problematic for upstarts, but not necessarily for the companies we have in mind.
Tactically, we can split the communications effort quite simply into the preparatory phase before the initial filing, what is often called the road-show whereby the company and the shares themselves are placed with institutional market participants, the quiet period before the actual IPO and the post-IPO stabilization.
Strategy, which is to say actually charting a course through all of this process successfully, is where management truly pays for itself. First, once the IPO decision is made, many aspects of the company will have a spotlight placed on them. Primarily, this is regarded as a matter of regulatory oversight since retail investors need to be protected. But it also covers aspects which may not have drawn much attention beforehand and be well within the law, such as environmental standards or social impact. Building a track record on all these points is very much required before media attention turns to speculation.
Likewise, relations with market participants need to extend well beyond bank managers and a few brokers. As a public company, one is not only selling goods and services but also shares. These are the buyers and sellers of that product and having the weight of pension fund managers or mutual funds managers in one’s corner can anchor stock prices from many quarterly noises. As such, investor relations is not something a strategically minded company would take lightly. Most of the companies we have in mind already have a department in place, but this will likely need to be expanded, have increased funding, and be helped build a wider pool of both direct relations as well as capacity to respond to crises.
Once these are in place, the road to the big day is fairly clear. Once retail investors are in sight, the company needs to remember the pre-IPO quiet period, during which non-public information needs to be severely limited. The rules on this are actually interpretable and there is some leeway but at this point all the previous groundwork should suffice as to not require much risky drumbeating.
Finally, post-IPO price stabilization will need both previous relations with institutional investors as well as making sure communication with retail investors sticks to the plan. The work should pay off, enabling the company to access more funding from more sources while allowing retail investors to share in its success.
Not a bad outcome for what would be, for many well-established Romanian companies, mostly a communications effort.