Discounts typically provided on initial public offerings of state enterprises in the Middle East and concerns about corporate governance are potential obstacles to growing issuance by private family businesses in the region, argued asset management executives.
Claus Nouveau-Nikolajsen, managing director for global markets at securities company ADS, said he had some 15 family-office clients in the United Arab Emirates considering a listing.
If the planned IPO of Dubai family-owned conglomerate Al Habtoor materialises, it could be the start of a strong flow for this year and next, he noted. “There’s a long waiting list for companies, with structures to IPO, and this is certainly good from a global investment point of view.”
But there will be challenges. For one thing, the big IPOs in the region still typically come from state enterprises, where shares are offered first to retail investors in an effort distribute national assets and wealth to the public.
A prime example came on November 2, when the Saudi Arabian government closed a $6 billion IPO of the country’s National Commercial Bank (NCB) the second largest global IPO this year after that of China's Alibaba. The NCB sale was limited to local retail investors and the public pension fund, with institutional investors only allowed to buy when trading began on November 12.
The bank reported requests for $83 billion of shares, 23 times the amount sold to Saudi citizens; head of research at local firm Riyad Capital Asim Bukhtiar, told Bloomberg that prices would likely increase by close to 100%.
Some 95% of the investor base in the region is retail, noted Robert Ansari, Middle East head at index provider MSCI.
For such investors, the new pipeline of private IPOs will seem expensive without the government discount. And there will be a strong pipeline of government issues from Qatar in particular. The country has seen announcements for an expected $50 billion in IPOs over the next five years, said Ajay Kumar, assistant general manager for asset management at Qatar National Bank.
A further obstacle for investors to the appeal of family firms’ IPOs is the history of poor corporate governance in this sector. Family offices still have a poor understanding of their obligations, said Nouveau-Nikolajsen.
“They are opening up and giving more thought to the type of governance that they need to be able to provide,” he noted. “But there still needs to be a big emphasis on education in this area and the responsibilities of owners to behave in the proper ways.”
Governance remains poor at family-owned companies, which is holding back the success of IPOs, agrees Kumar.
Another problem is that since these firms are typically large conglomerates combining a wide range of businesses, investors have difficulty understanding the core business model and question the ability of the management to oversee a large number of firms in such different sectors.
Concerns about governance at Arabtec, the largest construction company in the Persian Gulf and builder of Dubai’s Burj Khalifa, saw its share price drop by a third in mid-June when its chief executive, Hasan Ismaik, resigned.
Investors had sought greater disclosure over the shareholdings of Ismaik, who had built up a large personal stake in the company. They questioned whether Arabtec had provided adequate disclosure over the period, especially regarding Ismaik’s shareholding, and why neither the Dubai exchange nor the UAE regulator, the Emirates Securities and Commodities Authority, had provided it.