The cash-flow problem
After the mass privatization process ended IPFs had to survive with the acquired portfolio. Several trends were obvious in both countries. First of all, the number of IPFs decreased significantly. In Russia from the 650 licensed IPFs only 350 were active in 1995, according to a governmental estimate. There were 67 mergers among IPFs and 69 of them transformed into joint-stock companies. Overall the analysts consider that only 25-30 of them have played an important role on the stock market and managed to acquire an active portfolio with long-term perspectives of survival. Since many of the IPFs were relatively small this trend is not surprising. Many of them simply went out of business.
Many of the funds simply have not managed to earn sufficient profits to survive. One important reason for this is the illiquidity of the securities markets and of the market for the funds’ shares. Although the mass privatization programs ended, state continued to maintain control over major economic players. In Czech Republic, Banks dominated the creation of the IPFs. But they were controlled by the state which postponed the privatization of the banking sector. This impacted negatively on the efficiency of banking sector, which was unable to support the restructuring of the newly privatized companies. As a result their efficiency did not improve significantly. They were unable to pay dividends which translated in illiquid financial markets and further on the profitability of the investment funds. Moreover, IPF were unable to generate a market for their shares. In Russia once the mass privatization ended, most IPFs traded the most lucrative shares. As a result they were left with a poor portfolio. The remaining shares were under-evaluated, being trade at a market value much lower than the nominal value of the funds’ shares. The illiquidity of capital markets in both countries was further amplified by the lack of trust of population in IPFs. In Czech Republic the existing funds, made unreasonable promises to attract voucher capital. Being unable to fulfill their promises, people lost their trust in the funds as financial intermediaries. The very fact that people chose to invest their capital vouchers into newly created IPFs (in the second wave of mass privatization, in Czech republic were created 221 new IPFs) rather than in the existing ones make a compelling argument for the generalized lack of trust in IPFs as financial intermediaries. In Russia things were even worst. Thousands of unlicensed financial companies took advantage of loose regulations and attracted populations’ savings (i.e. Pyramidal Schemes). 80 millions. Russians invested in such schemes and 50-70 trillions rubles were lost.
Another issue that impacted negatively on the overall IPF’s profitability was the double taxation problem, which hindered IPFs attempt to attract new investment. Vouchers Funds faced a double taxation system. The fund itself paid taxes on its profits. Fund’s investors also have to pay taxes for the dividends paid by the fund. Under these circumstances, a strategic investor paid fewer taxes if he chose to invest directly into a company rather then in an IPF.
However, few IPFs managed to overcame the cash-flow issue. They managed to gather a lucrative portfolio and to restrain from trading it immediately after the mass privatization ended. They also managed to acquire large stakes which afforded them to actively participate as corporate agents’ post-privatization. Another explanation for their success is that some of them were part of financial groups, especially in Czech experience of mass privatization. As a result they faced less severe financial constraints, having an easier access to loans when they needed them. Most importantly, the successful IPFs managed to diversify their portfolio of activities. They offered a large range of financial services, from investment and reengineering expertise to arranging credits for companies. This additional revenue complemented the revenues from management tax and afforded IPFs to gain profits
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