Only mature companies with actual products, proven management teams, and solid financial results need apply.

July 2005
According to many investment bankers in the region, ideally that should be the application requirement for any firm looking to go public. However, the current regulations governing initial public offerings and valuation of the existing companies are preventing a number of leading family owned businesses who actually qualify under these specifications to even consider it. Of the multitude of IPO issuers on record at Zawya.com our analysis reveals that less than 10% of those are family owned companies despite the fact they make up the largest part of the GCC's private sector.

For example, for many leading family groups under the existing UAE regulations, raising capital via an IPO is a tough choice between losing management control and raising additional capital for further expansion of their businesses. Case in point was the recent private placement of Damas. The company was all set for a public offering some time this year, but was forced to pull out because of the minimum that the company could offer to the public is 55 per cent under the existing UAE laws. Though not ruling out the possibility of a public offering in the future, the current owners do not want to cede controlling interests of equity in their company from day one to investors who are not entrenched in the business as they are.

The Egyptian market for instance allows businesses to relinquish control gradually, as exemplified by the recent announcement by Oriental Weavers of a secondary offering. The issuance would reduce ownership of the Khamis family's stake in the group to reach 60%, down from 70%, allowing the company to increase liquidity yet still allow its management to retain control of its day to day operations, while yielding a good return to its investors.

"The rules governing initial public offerings still need significant improvement" states Khalid Fouad, Senior Vice President, Investment Banking at The National Investor. "The regulations currently in place were drafted in 1984 and do not reflect the massive developments that have occurred in the country's capital markets. Allowing mature and profitable companies to go public would benefit the investor base to a much higher degree than the creation of newly formed investment vehicles to circumvent the current laws."

In addition to the minimum listing requirements, investment bankers also state that the current valuation methods employed by the Ministry of Finance are too rigid and do not reflect the future potential of the companies seeking to float their shares. "Any valuation should consider the entity's operating history as well its future potential," adds Fouad. " A company that has a minimum three year track record, an established board of directors and a fully functional management team with proper corporate governance procedures in place is more likely to succeed in the long-run and is a better value for investors, as these are important factors that contribute to the success of any organization. "

Salam Saadeh, SVP, Capital Markets and Business and Product Development at Shuaa Capital agrees, "The current rules as they stand do not support mature businesses and favor the establishment of greenfield projects in sectors that are easy to sell such as real estate and investment banking as can be witnessed from the number of these types of companies recently coming to market. But with the new companies law expected sometime in the third quarter, a change in the current status of valuation methods employed and minimum listing requirements will likely be implemented, allowing a wider range of companies in various sectors to become available to investors."

So with the imminent advent of these new rules what about start-ups? Saadeh opines the following, "start-ups would not be penalized by the new rules. Floating start-ups who are sponsored by a team of institutional investors with experience in seeding new companies could be one solution. However, these companies would actually be better served by specialized private equity and venture capital firms as is the usual case in developed markets."

Others make the case for the eventual establishment of a two tier market which would strike a balance between start-ups and mature companies. But with the capital market still at what most consider an embryonic stage and no prevalence of different classes of shares (i.e. Class A, Class B) issued for a majority of the existing listings, most bankers see this as potentially a long-term solution. For the most part establishing a proper equity culture where investors view the stock market a forum for long-term gain is said to be the foremost priority. Shifting the investor base from day traders and attracting genuine investors who understand the risk/return spectrum is key, and this can only be done by providing them a choice of qualified investments to choose from.

Expected IPO Issues for the month of July