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. Last Updated: 07/27/2016

Insurer Finds IPO is No Easy Sell After All

The market finally doled out some wisdom last week to a Russian firm going public: If your head swells up too big, you won't fit through the door. The company had no choice but to listen.

Like so many of its peers that have held initial public offerings, RESO-Garantia, a small but dynamic insurance provider, seemed to think that it could strut onto the market on little more than promises and be met with a shower of cold hard cash.

The price it sought for its emission, as much as $500 million for a 20 percent stake, was high pretty much anyway you sliced it, except in the one sense that such firms most often like to cite -- their growth. "The company is very fast-growing and works in one of the fastest-growing sectors in the market," a RESO spokeswoman said repeatedly Friday when asked to justify the placement price.

Sure, it's growing pretty fast. First-quarter revenues on all of its products shot up at least 50 percent year on year, and as the first insurer ready to go public, it would have been the only point of access to the industry, which saw an average of 47 percent annual growth from 2001 to 2005.

Like most Russian firms headed to market, RESO also did a good job garnishing the IPO: It brought in two European directors in April and hired a trio of top Western bookrunners. The firm even sold the European Bank for Reconstruction and Development a 10 percent stake for $150 million to attract what it called "a vote of confidence."

But its net profits, the one thing you can really see, came to a mere $26 million in the first quarter of this year, and that was a company record.

"All those growth numbers are projected, not real," said Kim Iskyan, co-head of research at UralSib. "Of course it may all go swimmingly, but what if they don't keep growing as fast as they say and I get shafted? People are just hesitant to buy something they can't see."

In their hurry to get exposure to the Russian market, Western investors have not always been as wary as they should have been, Iskyan said, allowing some Russian firms to get away with blatant overpricing.

The first six months of this year saw $26 billion worth of public offerings, compared with the $17 billion raised in all of 2006. More than half of the companies that held local IPOs are now trading below their offer price.

And with the 20 IPOs that took place in the last 12 months, including VTB's $8 billion sale, "there was a bottleneck of paper coming onto the market," said Andrei Burlinov, head of investment banking at Troika Dialog, which helped place more than $12 billion in Russian equity last year. "Even going into July there is a very packed schedule of emissions. Of course investors have gotten more demanding."

Perhaps the biggest drawback for the economy as a whole has been the amount of liquidity the IPO craze has sucked out of markets. Most analysts blame this phenomenon for making Russia the second-worst emerging market, pacing only Venezuela so far this year. If RESO's experience touches other firms looking to go public, then they might be inspired to wait until the bottleneck clears, and this might give the country's lagging markets the liquidity they need for a recovery.

RESO looks like it is throwing in the towel -- for now. "We are not excluding the idea of an IPO, but at this point we are looking at various other sources of funding," the RESO spokeswoman said. "We'll have to wait and see."