BUCHAREST - Romania's new reform-minded government has spurred the creation of three funds that will raise up to $160 million for investment in the country.
In late March, London-based Societe Generale Emerging Europe Asset Management closed a $50 million, seven-year fund that will invest in small, private companies in Romania.
Later this month, London-based Daiwa Europe Ltd. is scheduled to close the Romanian Investment Fund, a five-year, $60 million fund that will invest in both public and private companies.
Hong Kong-based Regent Pacific Group is slated to close a yet-to-be-named $100 million, three-year fund dedicated to investing in the Balkans, with 50% of the money designated for Romania.
Also, funds focused on Eastern Europe and the former Soviet Union that always had the opportunity to invest in Romania are now increasing their exposure to the country. Pictet First Russian Frontier Trust PLC, a $135 million closed-end fund, doubled its asset allocation for Romania to 2.6% in the last few months and plans to raise it to 6% in the next six months.
"Investors see the catalyst of change in Romania," said Julian Mayo, director of product development in Regent's London office. "We find the best opportunities are where there has been a major event. If you are first in the investment market, assets can multiply in a short amount of time."
That major event in Romania was November's ouster of Ion Iliescu, the Socialist president who preached reform but never really enacted it, and the election of Emil Constantinescu, of the Democratic Convention of Romania, an opposition alliance party. The election marked the first time in Romanian history that the head of state was changed by democratic process rather than death, execution or coup d'etat.
But that's not what has investors excited. They are impressed by the swift action Mr. Constantinescu has taken since the election. So far, he has lifted controls on utility rates, cut social spending, signed a $430 million stand-by loan agreement with the International Monetary Fund, closed numerous failing state-run enterprises and jump-started privatization.
Romania always interested investors because of its rich natural resources and population of 23 million, second-largest in the region after Poland. But only recently have investors had the confidence to really move into the country.
"We've been thinking about doing this for over a year," said Roman Matkiwsky, senior fund manager at the Societe General Romania Fund. "We considered it six months ago but only in January could we really see the country was moving in the right direction."
Still, there are many risks involved in investing in Romania. Mr. Constantinescu might not be able to follow through with reform.
He has popular support for the austerity budget package, but experts say that could wane if the program significantly worsens the plight of Romanians.
The previous government signed four stand-by loan agreements with the IMF, but none was delivered in full because the government failed to deliver the reforms laid out in the arrangement.
Other investment hazards are more concrete. Romanian inflation has been skyrocketing. In 1996, Romania's annualized inflation rate was 38%, but it had escalating by the end of the year. In March 1997, the monthly inflation rate was 30%, roughly double what it had been in February. Inflation is expected to end this year with an annualized rate of 150%.
Surging inflation is a result of three factors: pre-election deficit spending by the Socialists in an effort to win the election, lifting of price controls, and the devaluation of the currency caused by ending state control of the exchange rate.
Repatriating profits is also an issue. Foreign investors can take profits out of the country, but it involves a long, bureaucratic process.
Discussions on legal reforms to ease repatriation of profits are under way.
But not all legal changes may favor foreign investors.
For example, one option under discussion would put an 85% capital gains tax on profits from investments with a tenure of three months or less.
Currently, there is no capital gains tax in Romania.
Another concern for portfolio investors is the lack of liquidity and selection on the Bucharest Stock Exchange.
There are 34 issues trading on the exchange and roughly another 2,500 that are traded on the RASDAQ, which is modeled after the NASDAQ system in the United States.
RASDAQ issues are a result of an earlier mass privatization program, in which Romanians were given vouchers to buy state assets. Now Romanians are allowed to trade the shares, but none of the companies listed on the RASDAQ is required to do any financial reporting.
Consequently, investors need to make a real effort to find out even basic information about the companies.
BSE-listed companies do have to report and disclose financial information, and those stocks are gaining popularity among investors.
There is no BSE official index, but as of April 24, the Vanguard Index of Romanian stocks was up 149.4% from the beginning of the year.
Turnover on the BSE is dominated by two companies: Azomures, a chemical fertilizer, and Otchim, a chemical company. Selection is supposed to broaden as companies move from the RASDAQ to the BSE and the government privatizes large assets such as the phone company.
Mr. Matkiwsky said his fund is buffered by some of the risks associated with investing in Romania because it will make long-term direct investments in companies it trusts.
"There are a lot of companies that aren't on the stock market," he said.
"Why limit yourself to those companies on the exchange? Those are larger companies in need of restructuring. We are looking for growing and successful companies."
Mr. Matkiwsky also noted his fund has three professionals in Bucharest.
Michael Watson, managing director-equities at Daiwa, said his firm's Romanian Investment Fund will have two local advisers. The advisers - the Romanian-American Enterprise Fund, a U.S. government-created venture capital fund, and Investment Bank Austria Securities Bucharest - will give the firm an edge in finding solid prospects, he said
East Fund Managers, a partnership between Alliance Capital Management L.P., New York, and Investment Bank Austria, Vienna, will manage the Romanian Investment Fund.
Regent's fund will invest almost exclusively in stocks, but Mr. Mayo is not overly concerned with the problems of pouring money into a still-developing exchange.
"This is a country that wants foreign investment," Mr. Mayo said.
"Sure there will be teething problems, but this market is being developed in line with needs of foreign investors," he added
Mr. Mayo compares investing in the Romanian stock market with investing in the Russian stock market, where Regent Pacific has scored huge successes. Russia certainly has its share of economic problems, but its stock market was one of the world's best performers last year.