Undermining the UK stock market
In the past two years, Nathaniel Rothschild has made a name for himself, and a great deal of money, by promoting some of the largest initial public offerings on the London Stock Exchange.
At a time when IPOs have been few and far between, he has raised £2bn for two investment vehicles whose purpose is to buy assets in emerging markets. Mr Rothschild promises to “unlock” the value “trapped” in natural resources companies that hail from some of the rougher parts of the world.
These are injected into his vehicles where, by virtue of superior corporate governance and respected management, they magically transmogrify into suitable investments for mainstream funds. So persuasive is Mr Rothschild that conservative investors have been queuing to buy his shares.
But if the pitch has been seductive, the results have been less reassuring. The fortunes of one of his vehicles – Bumi – have become entangled in the Byzantine financial affairs of the Bakrie family, the company’s biggest shareholder since it purchased their Indonesian coal business last year. Bumi’s future may now be determined according to what best suits the interests of the politically well-connected Bakries, whose business empire faces a liquidity squeeze. Shares in the company are trading at 25 per cent below the IPO price.
Mr Rothschild’s other vehicle, Vallares, has yet to prove its mettle. But it has no less of an appetite for risk, judging by its planned merger with Genel, a Turkish oil company. Not only are Genel’s operations located in the legally uncertain territory of Iraqi Kurdistan, but its chairman has just been sentenced by the Turkish courts to an 11-year jail term, although this is being appealed.
Mr Rothschild is not alone in swaddling risky companies in the reassuring clothing of a British plc. A number of mining companies, many controlled by oligarchs, have listed in London in recent years, including ENRC, Vedanta Resources and Kazakhmys. The UK authorities have even facilitated this trend by relaxing their own rules – notably on the size of the minimum free float required.
These companies have not evidently adopted UK standards of behaviour and have engaged in related-party transactions where the interests of the controlling shareholders were potentially in conflict with those of outside investors. Nor when disagreements arise do the vaunted governance safeguards always work. When the controlling oligarchs and non-executives at ENRC clashed earlier this year, two outside directors were promptly hoofed off the board.
There is nothing wrong with investors backing risky ventures – as long as they do so voluntarily. But London’s attraction for foreign companies seems to be the chance to join one of the key indices – especially the FTSE100. Once obtained, membership obliges the pension and mutual funds that passively track the index to buy their shares. These investors can neither sell, nor can their votes influence anything in what are controlled companies. The suspicion is that it is this – rather than any improvement in governance – that releases Mr Rothschild’s “locked” value.
If so, it is a piece of regulatory arbitrage for which he is richly paid. Recently, he and his partners received a share windfall worth £138m for arranging the Bumi takeover. With such incentives on offer, there is every encouragement for others to follow his lead.
The authorities must take a tougher line. The low standard of governance among some companies is not just a threat to those who invest in them. Wider valuations could be tainted by a governance discount, which would have the perverse effect of raising the cost of capital for all UK companies. Mr Rothschild should not be allowed to make his money potentially at everyone else’s expense.