There Is no Power that Can Make Foreign Investors Buy Bulgarian Shares

Mr. Scarlatov, a large number of start-ups and even growing enterprises in Bulgaria rely mainly on their own funds and seek funding from business angels or strategic investors. When does the raising of capital through an initial public offering of shares emerge in the growth plans of the companies?

I believe that the readers will not like the answer, but there is no way not to talk about the "bull in the china shop." In short, the corporate finance scene in Bulgaria in 2018 looks like this:

The activity of business angels is limited to the financing of miniature start-ups with investments of EUR 50-100,000, and very often they don’t receive a second tranche. There are also successful examples, but they are few, mostly in the technology sector.

There are only three equity investment funds, two of them being co-investment ones (they can only invest jointly with other investors within a transaction). They choose their investments very carefully and set a lot of conditions, that is why the chance for a transaction is very small.

Strategic investors can come mainly from abroad, but they generally enter to buy cheaply. Their purpose is usually to put the label "made in EU" or to reduce costs, mainly for development and engineering. So, local businesses must choose between either selling themselves out cheaply or, in case they use professional consultants, getting a reasonable price for their business, which is usually significantly higher than the price offered by investors, and thus the transaction does not take place.

Respectively, the businesses must rely mainly on bank loans for financing. In Bulgaria, it is primarily of a commercial nature, and the so-called development or project funding practically does not exist. As a result, the developing businesses remain static for years, and due to the lack of finance, they miss many opportunities.

Thus, we end up at funding through capital markets. In order to start the structuring of a securities transaction, the company must have reached an income of at least BGN 10 million and achieved a profit of at least 10%. This automatically hinders all developing companies that are mostly below this limit, as well as those who have the income, but lack the profit. Our job as investment bankers is to identify projects that are interesting from a financial and commercial point of view, to collect the "loose sheets" in structured project documentation and to seek funding, mostly outside of Bulgaria.

How can investment banking catalyse the development of Bulgaria as an "intelligent" investment destination?

The high-tech sector really is, and should be, the business card of Bulgaria that will attract as many sectoral investors as possible. The reasons for this are two: the first is that we have a substantial local human resource at a good price that is well trained. Unfortunately, its volume is insufficient and that is why we see a growing inflow of specialists from other countries.

The second reason is that the political risk is isolated in this sector to a higher degree: little or no infrastructure is required for its development. This more or less limits the risk for foreign investors. If a software company is not happy with a policy change or administrative burden, it can easily move its people and business to another country, unlike traditional large capacity productions.

In this sector, investment bankers may be included at a relatively late stage, after a critical mass at an individual company level has been accumulated. The sector may be large but it is composed of a great number of small companies. With these small companies, the players are the business accelerators and the venture capital funds. We follow their growth and the time when certain businesses are large enough to seek funding for the next stage of their development. We are currently working on an interesting transaction which promises to be the largest in the IT sector in Bulgaria, but there is still time until it is closed.

You and your colleagues have been developing Anglo-Saxon Investment Banking in Bulgaria for 10 years now. How does the investment banking market "mature" in Bulgaria?  Why the time for creating a Bulgarian Association of Investment Bankers is now?

Ten years ago, the sector was almost non-existent because nearly 100% of it included consulting privatization deals. In recent years, investment banking has been developing at the pace with which the economy and its participants mature and realize that a strong structured approach and adequately prepared documentation are needed to attract investors and/or funding. Just as it happens with projects financed by European funds, for which the documentation has mandatory requisites. The difference is that in investment banking these requisites are a sectoral standard. Investment bankers essentially play the role of a bridge between businesses, money and investors, so that a project can be realized.

BIBA aims to consolidate a sector that has so far been considered mainly as separate entities. We strive for all investment bankers to be united under one roof and not be identified as investment companies, asset managers, brokers and other financial terms that have nothing to do with investment banking. There are many good Bulgarian investment bankers abroad, but unfortunately, our nation is poorly represented in this sector on a global level. It is people with international know-how that will be an important part of the association in order to develop the sector in Bulgaria with the knowledge from outside.

How can the Bulgarian Stock Exchange (BSE) in Sofia attract international investors despite our country not being a top stock exchange destination?

There is no power at the moment that could make foreign investors buy Bulgarian shares. The main problem of the secondary market is the extremely low liquidity that scares investors. Their worries are that they may be "stuck" with a certain share that they cannot sell when they want to get out of position.

On the primary market, on the other hand, the amount of new issues offered to investors is extremely small - usually less than BGN 50 million, which according to all standards is under the radar of foreign investors. In addition, the shares are comparatively fairly valued and the growth potential is not high enough in percentage terms to justify the level of risk. I say this with pain because I want to see our Bulgarian capital market flourish, but I do not think that it will happen soon. Foreigners will not come and increase liquidity if local players are not active, and there are almost no such players at the moment. Five pension funds and five mutual funds cannot provide a liquid market.

When do you expect the cryptocurrency market to be a factor in the movement of the stock exchange in Bulgaria?

There is no connection between the stock exchange and the cryptocurrencies, at least at this stage. I do not expect that there will be such a connection in the near future. We, in Mane Capital, are very active in the ICO sector, because we believe in tokens as a way of funding. The market will become even more interesting when some basic regulation for structuring and documenting an ICO come into force. Currently, we are working on 3 ICOs, the first of them to be introduced on the market very soon being VERNAM.

What are the most important life lessons you have learned as investment bankers?

The capital market is a miniature copy of our life - nothing is what it seems. The logic dominates only 1/3 of the time; the rest is either euphoria or panic. "The invisible hand of the market" is already a myth. The forces that define the rules and movements are not the ones we read about in the textbooks.