Autumn 2014

IPO MARKET: Why family values are best in public

FamilyRaising capital, gaining foreign investors, avoiding succession disputes – there are many reasons for family businesses to go public. Regulators are starting to offer incentives to help them, finds Dave Waller. Business in the MENA region – it’s a family affair. According to Ernst & Young, 90% of the companies in the Middle East are family-owned, and these contribute approximately 80% of the GDP in the region.  It’s been that way since those family trees were found to be growing amid vast reserves of oil and gas, which fuelled an explosion of wealth. What hasn’t always happened is the listing of family businesses on stock exchanges. Yet as these companies evolve, so owners are coming round to the idea of initial public offerings (IPOs) – of opening the front door and letting others in on the action.  IPO activity in the region has traditionally been low. MENA stocks aren’t exactly renowned for attracting institutional investors, and what activity there is has tended to involve government companies or quasi-government companies.  Here, the IPO serves as a kind of wealth distribution mechanism, designed to get the wider populace active in the markets. Think British Telecom in the UK in the 1980s. KEEPING IT PRIVATE
Indeed, Ernst & Young estimates that a mere 8% of family businesses in the region are publicly traded. Owners in the region have typically required a great deal of encouragement before they’d even consider the benefits of an IPO, and if anything they’ve become more reluctant. “Families in the Middle East are especially private, and have only become more so since the crisis,” says Jahangir Aka, managing director of SEI Investments Middle East.  “They’ve become very conscious of outsiders coming in and poking around. They’d ask: ‘Why would I want all these people asking questions of what I do for a living, for the sake of an extra $100 million?’ Why would they want to share a successful business with the public?” It’s a good question, but there are persuasive answers. First, listing comes with a promise of immediate cash, which could be useful for growth. An IPO also gives a market valuation to the business, which can be useful for succession planning.  Meanwhile, if the family gets too unwieldy for everyone to take a productive role in the business (a common problem in places like the Middle East, where families are often large), an IPO can provide a way to buy out those less interested.  It can also simplify the ownership structure and improve the discipline of financial reporting and governance. WHY FLOAT?
A small but significant number of family businesses are choosing to list. Last year, 23 MENA family and non-family businesses raised $3 billion in public listings, up 64% in volume and 51% in value compared to 2012. Damac Real Estate Development, a property developer controlled by the Sajwani family, raised $348 million on the London Stock Exchange. Other successful family floats of the past include Halwani Brothers Company, a diversified food and retail group, and Jarir Marketing, both of Saudi Arabia. Damas International, the jewellery and watch retailer, was less successful. It posted negative results and fell foul of governance requirements, with its founders discovered to have withdrawn funds for personal use.  So what is the interest in floating now? Aka describes it as “not yet a trend, more a niche,” but also reports a strong pipeline of families in Saudi Arabia seeking to list. These firms typically pursue listings for different reasons to western businesses.  While the latter tend to be mature businesses looking for much-needed capital for growth, in MENA you might find a large family businesses, comprising 80 or 90 separate wings, that wishes to specialise and consolidate. The company may want to strip down to say, 70 businesses, and list the 20 that are surplus.  Perhaps the greatest benefit from IPOs is to protect family companies from succession disputes. While first-generation businesses are still in the growth phase, many of the region’s most successful family businesses are passing to the second or even the third generation. Such a process is often tricky to say the least – studies show that 90% fail to survive the transition to the third generation. An IPO may help overcome these obstacles.  “The succession question has spurred the transformation of family businesses into more institutional entities that are more competitive and not susceptible to family succession disruptions,” says Phil Gandier, transaction advisory services leader for MENA at Ernst & Young. “This could all pave the way for more IPOs in the region.” NEW GENERATION
It is also worth noting that many of those inheriting these family firms have been educated abroad at top international universities, and are now returning to the Middle East. They may have a broader understanding of modern financial matters and the benefits of IPOs than their forebears. And this may be needed in the current climate, as the globalised world involves working beyond the established networks and protectionist environment that helped foster the wealth in the first place.  Either that or they lack interest in the family business and want to do their own thing. “In the third generation the owner may be a Harvard graduate, who’s come back to the Middle East and is very comfortable with the IPO idea,” says Aka. RELEASE CAPITAL
“I know a family where the son has inherited his father’s agricultural trucking business, which largely involves shipping eggs from one Arab country to another. He has no interest in eggs – he wants to set up a snazzy restaurant business. And an IPO is a great way to get out of it: bring in an independent CEO, keep the cash flow dividends coming in, release capital and go off to set up the restaurant instead.” Even those young family business owners who are happy in the field they’ve inherited may be keen to list their companies.  They look at IPOs as a means of monetising wealth, raising capital and institutionalising the business. But the change in culture from being an owner-operator to having to answer to shareholders can be difficult, and such challenges are only exacerbated by the current regulatory landscape.  “Family businesses wishing to list are often held back due to the stringent listing conditions in many countries,” says Gandier, “and regulatory restrictions and sanctions are major obstacles for listing domestically. The condition to float a significant percentage of shares, for example, is often considered to be a major blockade for listing. This places particular pressure on family businesses, which are reluctant
to lose management control of their firms.” Governments have recognised this, however, and are beginning to offer incentives. In the UAE, families are allowed to keep as much as 70% of their equity should they wish to go public – up from a previous, more discouraging, 45%.  “Family businesses are being encouraged by the governments to list on domestic stock exchanges, which could help address some of the lingering issues faced by the sector,” says Gandier. “These issues include corporate governance, access to capital, business expansion, diversification and divestment
of holdings.”  It seems the cosy, if insular, world of Middle Eastern family businesses is changing – whether for the benefit of the individual at the top, the family, or the business as a whole.  This could be good not only for the families and businesses themselves, but for the wider region too. An increased number of listings would add to the liquidity of the bourses, and a larger number of companies available for trading would not only tempt more domestic investors to get involved with the stock market but also help to attract greater foreign investor interest. ©2014 funds global mena

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