The manager of a turnaround fund that has produced supercharged returns overhauling Romanian state companies is in discussions to take the model to other emerging markets.
US investment firm Franklin Templeton told the Financial Times that it was in talks with more than five governments to reproduce Fondul Proprietatea. The vehicle has returned nearly $7bn in capital through dividends and buybacks to shareholders including Romania’s government since it was listed in 2011.
Franklin Templeton says that Bucharest and London-listed Fondul has helped put a formerly little-known corner of Europe’s capital markets on the map after improving the corporate governance of Romanian state companies and then listing or selling minority stakes. Hidroelectrica, a hydropower operator that was owned by Fondul, was Europe’s biggest initial public offering last year.
“We have ongoing active discussions at various stages of progress with more than five governments around the world,” said Marius Dan, deputy chief executive of Franklin Templeton’s Bucharest operations. That total includes Uzbekistan, which signed a memorandum of understanding with Fondul last year, he said.
Fondul has delivered a more than 500 per cent return in dollar terms, including share price gains and dividends, since listing, well ahead of the benchmark return for emerging market stocks. That has made it popular among investors in frontier markets in recent years, with some eager to find a similar vehicle in other countries that they can invest in.
“We do think it is repeatable,” said Johan Meyer, Fondul’s portfolio manager and chief executive of Franklin Templeton’s Bucharest unit.
“We have engaged with various governments in the region and further afield . . . this is a very strong record,” he said, pointing to value that has been created in the fund’s holdings as well as the capital returned to shareholders.
Many emerging markets, including South Africa and Saudi Arabia, are weighing whether or how to open up state companies to foreign investors as a way of improving oversight and efficiency, and potentially enjoying a windfall from outsized returns. But it is a politically fraught process.
The Romanian government, which owns 6.5 per cent of Fondul’s shares, is now seeking to use the fund to back private equity projects. It has put the mandate to manage the fund out to tender, with Franklin Templeton’s current tenure due to expire next year.
Some investors doubt whether the model is replicable, given Fondul’s origins in Romania’s transition from communism more than 30 years ago.
Fondul was created in 2005 and seeded with stakes in state groups as a way of trying to compensate Romanians who lost property under communist rule. However, many recipients swiftly sold shares in the fund that they received, missing out on future gains and pushing Fondul’s stock far below the value of these assets.
Franklin Templeton was incentivised to realise the assets and reduce the discount by earning a fee of 1.75 per cent on returns of capital. Paul Singer’s Elliott Advisors also pushed for high returns when it was formerly Fondul’s single largest shareholder.
“They have returned a lot of capital, but for me, buybacks at a discount don’t count as restitution to the people it was intended for,” said Dominic Bokor-Ingram, senior portfolio manager for emerging and frontier markets at Fiera Capital.
Hiring a professional investment manager to oversee stakes in state companies “does make a difference, and it will definitely do more good than harm” for any countries that adopted this model, Bokor-Ingram added. “You would need a different structure” for returning capital, he said.
Franklin Templeton said that “the restitution activity itself was performed by the Romanian government, by transferring Fondul shares from the government to the beneficiaries”.
Within Romania itself, “by no means is the Fondul story played out”, Franklin Templeton’s Meyer said. As well as Hidroelectrica, the fund owns stakes in Bucharest’s airport and the Constanța port on the Black Sea, which has at times been strategically important in the war in Ukraine.
The Romanian government has pushed to pause asset sales as part of its call to change the fund’s strategy. Franklin Templeton said that it would continue to evaluate opportunities but “an IPO or sale of underlying assets will have to be individually approved by shareholders”.
Romania is the second most populous EU member state in eastern Europe, after Poland, but its income level and the size of its capital markets still lag the latter by a significant degree.
“Without our activity in the last 13 years since we listed the fund, Romania could still have been a relatively lesser known destination for investors,” Franklin Templeton’s Dan said.
“Without any false modesty, we have been a strong part of the ecosystem, and a magnet for bringing investors into the country, but also making state-owned companies more profitable,” he added.
Fondul “started a chain reaction” in Romanian capital markets, said Victor Căpitanu, head of One United, a Bucharest property developer and one of the country’s biggest listed companies.
As a result of the heightened investor interest, One United has been able to raise equity five times in the last seven years to finance expansion, he said. “Fondul has certainly helped raise the profile of investment opportunities in Bucharest and Romania as a whole.”
