Kremlin Said to Seek China Fund for Moscow Exchange’s IPO

The Kremlin’s sovereign wealth fund is seeking to bring China’s $480 billion counterpart into the Moscow Exchange’s initial public offering as an anchor investor, three people with knowledge of the matter said.

Chengdong Investment Corp., a unit of CIC International Co., may get as much as 25 percent of the shares being offered in the IPO, which the Moscow Exchange plans to complete tomorrow, said the people, who asked not to be identified because the information isn’t public.

The exchange, which runs Russia’s 50-stock Micex and dollar-based RTS indexes, said Feb. 4 it plans to raise at least 15 billion rubles ($500 million) selling shares on its own platform, after marketing the IPO in the U.S., Europe and Russia. A sale at the top of its range of 55 to 63 rubles per new and existing shares would value the company at $4.6 billion.

“This just means that the situation is hopeless,” Alex Debelov, chief investment officer at Moscow-based Third Rome LLC, which manages about $400 million in Russian assets, said by phone. “It’s terrible that the country’s main exchange has to get its private equity fund to attract a Chinese fund. The demand for the IPO seems to not be so great.”

China Investment Corp. and the Russian Direct Investment Fund, which owns an undisclosed number of shares in the Moscow Exchange, set up a $2 billion fund in June, seeking returns of at least 20 percent on investments in companies benefitting from growing trade between the two countries, according to the RDIF’s website. Seventy percent of that will be invested in Russia, the rest in China.

International Investments

CIC has been ramping up international investments to help boost returns on the country’s foreign exchange reserves and meet the nation’s thirst for resources. It may acquire a stake in German carmaker Daimler AG, the People’s Daily said on its website Jan 7. In November, it teamed up with VTB Capital to buy OAO Uralkali’s convertible bonds, which can be converted into a 12.5 percent share of the world’s largest potash producer.

Nobody authorized to comment to the media could be reached at CIC in Beijing due to public holidays there. Quinn Martin, a spokesman for the exchange, and Maria Medvedeva, a spokeswoman for the RDIF, both declined to comment.

The exchange has already received at least $300 million of orders from domestic and international investors, two of the people said. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, told reporters today he expects the exchange’s IPO book to be fully covered.

Boost Capital

The exchange plans to use its share of the IPO proceeds to upgrade its trading system and to boost the capital of its clearing subsidiary, the National Clearing Center. The exchange, which handles most stock and bond trading in Russia, will start working with Euroclear Bank SA, operator of the world’s largest bond-settlement system, on trading ruble-denominated government debt next month, according to Euroclear.

Russia’s central bank is the largest shareholder in the exchange, with 22 percent, followed by state-run OAO Sberbank with 9.6 percent, state development bank VEB with 8 percent, according to the exchange’s website as of Jan. 16. BlackRock Inc., the world’s biggest asset manager, bought shares in the Moscow Exchange from RDIF in September, the fund said Sept. 28, without providing details. RDIF had 2.7 percent in July. The European Bank for Reconstruction and Development has a 5.8 percent stake in the exchange, while VTB Group holds 5.6 percent.

Lock Up

About 60 percent of the stock offered in the IPO will be sold by existing shareholders through Micex Cyprus Ltd., while the rest will be sold as new shares via Micex-Finance LLC, according to the exchange. Following the IPO, shareholders will be subject to a 180-day lock-up period.

Credit Suisse Group AG, JPMorgan Chase & Co., Sberbank CIB and VTB Capital are organizing the IPO. Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Renaissance Capital and UBS AG’s investment bank are joint bookrunners.

The Micex Index advanced 1.7 percent to 1,537.65, a one-week high, at 6:32 p.m. in Moscow today.