The Day after Financing

Pavbar wrote some time ago that institutional investors will not touch Kibaran shares until financing is secured. This makes intuitive sense.

Recently I've been reading about risk orientation and thought that this may add something to some readers' perspective who haven't studied finance. There are generally 3 types of risk orientation where the definition of risk equates to volatility of the share price (this is a finance definition).

1) Risk-Seeking (Volatility-Seeking)

These are the gamblers who speculate for the thrill it provides. The gamble provides more value to them than the payoff or loss. Psychologically they are "sensation seekers" likely to: use drugs, drive dangerously, be promiscious and do other high-risk activities whilst seeking a neurological pleasure hit over anything else. Return matters less to them than the thrill of a gamble.

2) Risk-Neutral (Volatility-Neutral)

"Risk neutrality means that the investor cares only about return and not about risk" (Source: 2016 CFA Program Curriculum, Volume 4, page 344). A risk neutral investor makes investments based on expected return indifferent to the share price's volatility between the day that they buy and the day that they sell.

3) Risk-Averse (Volatility-Averse)

"In general, investors are likely to shy away from risky investments for a lower, but guaranteed return ... for all practical purposes and for our future discussion, we will assume that the representative investor is a risk-averse investor. This assumption is the standard approach taken in the investment industry globally." (Source: 2016 CFA Program Curriculum, Volume 4, page 344)

Observation/Speculation

Supply and demand for Kibaran's shares is currently dominated by Risk-Neutral investors (judging from what I've read on this forum - as a sample of shareholders). Risk-Averse investors have not and will not invest in Kibaran's shares until financing is completed because by the definition above they're happy to accept a lower return if the probability of receiving it is higher (i.e. they're happy to buy after financing is complete).

Demand & Supply for Kibaran's shares post-financing

Assuming that Kibaran obtains US$70 million in debt (as they've eluded to in announcements regarding KfW-IPEX Bank & Nedbank), the probability that Epanko will be constructed goes to 100% lowering the risk of an investment in its shares. At this point the investor base for Kibaran should expand to include an increased percentage of risk-averse investors (risk-aversion follows a spectrum from those that hold guns & gold, to cash, to securities etc.) that should dwarf the tiny minority of risk-neutral investors.

An increased investor base would open up a new frontier on the Demand/Supply balance for Kibaran's shares. The magnitude of this should be quite large because as stated earlier, the representative investor is a risk-averse investor.


Do you agree with this and what is your risk orientation?

I'm really interested to know.