FROM the Baltic to the Mediterranean, the governments of Western Europe are preparing to launch a wave of privatisations with an estimated price tag of more than US$100 billion. The sale of shares in state-owned or state-controlled companies is driven mainly by a desire to curb the growth in countries' budget deficits, so that EC member-countries can meet the criteria set out in the Maastricht treaty on European economic and monetary union. However, with such a barrage of stock likely to hit the international capital markets, albeit over a period of four or five years, the question arises of whether there is sufficient investor demand. ''It is going to be a big challenge'', says Ludovico del Balzo, managing director of the equity capital group at Lehman Brothers. He points out that unless some effort is made between the various governments to co-ordinate their sell-offs, through informal dialogue, ''there is a danger you will see some bunching up of issues''. Still fresh in the minds of many international investors, and a useful warning for European governments, is the case of Mexico. Mexican companies prepared a slew of international equity offerings early last year: but the supply proved too much for the market to cope with, and some offerings had to be put on hold over the summer months. Richard Davidson, an analyst at Morgan Stanley, says: ''To finance this supply, the international investor is key, interest rates must fall, and equity investment will have to be made more attractive to bond-oriented domestic investors.'' Investor interest in international equity offerings is already fairly widespread, and investment bankers appear optimistic that investors can be encouraged to increase their exposure to foreign markets still further. ''Increasingly in Europe we expect institutional investors to diversify internationally,'' says Charles Stonehill, managing director at Morgan Stanley International. Mr Del Balzo points out that while there is relatively less scope for UK investors to raise their investment overseas, given that it is high already, there is room for US institutional investment overseas to increase. But he believes that ''outside the UK and US, it would be unrealistic to expect a major contribution from markets other than the domestic one. I would expect the UK and the US to take the lion's share of an international tranche.'' Mark Newlands, director of equity capital markets at Nikko Europe, argues that there is considerable scope for Japanese institutional investors to increase their exposure to overseas equities. ''Pension funds are a huge source of investable assets, but historically a relatively low percentage is invested in non-Japanese equities because of a lack of familiarity and the recent strength of the yen,'' he says. But he points out that there is ''quite a lot of pressure on the Japanese authorities to ease regulations concerning the asset mix of pension funds. ''In addition, the Japanese are growing more yield-oriented, which should encourage them to turn to European markets, where yields are four to five per cent, against around one per cent in Japan''. While there is scope for US and Japanese investors to increase their exposure to overseas equities, investment bankers and analysts argue that certain conditions may have to be met to encourage a substantial shift. Mr Davidson, of Morgan Stanley, says interest rates ''must fall to levels where equities appear attractive compared with bonds and cash on an asset allocation view and where equity investors can feel confident of economic revival. ''This is the case in every market in Europe where privatisation is planned, but particularly in the countries with the largest capital demands for their privatisation programmes, ie France, Italy and Spain, where cuts in interest rates are imperative''. Obviously the companies for sale will have to be attractive investments in their own right. This means that, in some cases, companies might need to be restructured. At the same time, governments will have to consider additional incentives in order to make their privatisations attractive to a wider range of investors. The incentives could be tax-related, such as the tax-free plans available to private investors in the UK and France. No doubt some governments will be watching the reaction to France's Balladur Bond, which has the innovative feature of being convertible into shares in French privatisation companies, to see whether this proves a successful means of drawing in investors. ''I think we will see governments adopting a much more pragmatic approach to selling off companies,'' concludes one senior investment banker. ''But even so, it is going to be hard work.''
