The number of listed securities in the GCC is a flaw that the local governments have been trying to correct. Hence, there is a general consensus amongst regulators that getting more companies into the public market is a “good thing.” Their end goal is creating deeper markets with more securities and better diversification, ensuring lower market volatility, decreasing valuations to more reasonable levels, and spreading the wealth generated from economic growth and privatization to the general population.
Thus, GCC regulators have allowed more than $16 billion worth of IPOs to take place since 2004, and are examining the applications of an additional 90 companies. Of course, timing has been an issue, and some regulators have opted to delay some IPOs so as not to exacerbate the downward pressures already in play.
However, GCC investors (both retail and institutional) are becoming more discerning. Today, the IPO story has to be solid, and has to be one of growth and strategic focus. Management track record is essential for investors to buy into the future. Size is also an issue, as small IPOs may have difficulty in registering on the radar screen of investors and regulators alike.
Initially, the role of private equity funds was limited to acquiring minority equity stakes in companies just before going public. As part of circumventing the legal restrictions in the outdated listing process, funds would finance the establishment of a green field company that will acquire the operating company at a price closer to its true value, thus evade using the book value approach adopted by many regulators.
It became quickly apparent that funds can assume a bigger role in the preparation for the listing. Investors were more comfortable with a fund entering and ensuring that everything is in order and transparent. Funds would enter at a discount, and put their seal of approval that the company is ready for an IPO.
Nowadays, companies aspiring to be listed are faced with even a bigger challenge, and investors have raised the bar even further. In addition to ensuring proper corporate governance and proper financial accounting, private equity players are sought after as a strategic active investors that may propel the company to the next level by investing “smart” money. Strategic advise, business development, and financial restructuring are few of the services expected from the private equity funds. Top tier funds go as far as providing IT, HR, and operational consultancy. The latest research by KPMG has confirmed that “active” private equity funds have been rewarded with higher return on their investment.
As a result, PE-backed companies are proving to attract significant interest from investors. Maritime Industrial Services, the leading contractor for off-shore rigs, has been backed by Gulf Capital and two other PE funds, and is now preparing to go public on the Oslo Stock Exchange. The PE firms have brought institutionalization to MIS, and prepared its management to deal with the requirements for going public by first dealing with a limited number of active investors. Moreover, Gulf Capital has actively worked with MIS management on several strategic initiatives that have significantly improved the operation of the company.
This trend is set to continue as private equity increases its role in the M&A activity in the region. Whether it is the floatation of a privatized state utilities or a family business, the active involvement of PE funds pre-IPO will better prepare companies to deal with public equity market.
IMAD GHANDOUR, Principal-Gulf Capital. Head of Information & Statistics Committee-GVCA
