Anticipated Rule Change Could Spur IPOs of Family Owned Businesses

Family owned businesses play a central role in the economies of both developed and developing regions around the globe. Economic studies estimate that 40 percent of large companies in the United States and Europe are family owned. In the Middle East this percentage is even greater: more than 80 percent of Middle Eastern companies are owned or operated by a single family. However, the ownership dynamics within controlling families is quite fluid. Experts believe that over the next 10 years companies worth approximately US$1 trillion will be passed from one generation to the next within business-owning families.

In Oman, the central role of family owned businesses is even more pronounced. The local press has cited HE Yahya Bin Said Al Jabri, Executive President of the MSM, in reporting that 95 percent of Omani companies are family owned.

For this reason, safeguarding the future of Oman’s family businesses has been a key priority in the Sultanate’s economic development model. Recent plans announced by the Ministry of Commerce and Industry to lower capital dilution requirements suggest that the most promising future path for some family owned businesses may lie in tapping Oman’s public capital markets. This path leads directly to augmented share capital and strengthened corporate governance mechanisms.

According to a report in the Times of Oman, the government is preparing a new set of amendments to the Commercial Law which will lower the minimum capital dilution from 40 percent to just over 20 percent for family owned businesses undertaking initial public offerings (IPOs) on the Muscat Securities Market (MSM). By lowering the percentage of equity in the company that the law requires a family to relinquish, family owned companies should be more likely to float of portion of their shareholdings on the MSM.

The goal of these amendments and the policy behind them is that promoting public flotation will (i) strengthen family owned businesses by allowing them access to public investment capital; (ii) refine their corporate governance practices through adherence to listing standards; and (iii) streamline access to professional strategic and management advice that could fill potential succession gaps.

While Oman’s family owned businesses are currently among the strongest and most respected enterprises in the Sultanate, some family businesses may face vulnerabilities over the longer term. A leading professional services firm recently released a survey indicating that relatively few family businesses in the region survive beyond the third generation. That report also highlighted that only 16 percent of family owned businesses have instituted a clearly defined succession plan.

Another potential area of vulnerability for family owned businesses is the need for larger amounts of capital to compete in an increasingly international, big-player dominated environment. Concurrently, the more restrictive credit environment in recent years and some high-profile defaults by family owned businesses has made borrowing necessary capital much more difficult. Loosening the requirements for tapping the equity markets should afford family owned businesses another source of much-needed funds.

Similarly, as companies in many sectors grow larger, they often need a more formalised corporate governance structure in order to function properly. Becoming a publicly listed company and adhering to the MSM’s corporate governance standards should help provide structure and discipline to family owned companies.

Nevertheless, many family businesses have balked at the prospect of raising funds through IPOs. The current 40 percent capital dilution requirement has meant that any firm listing shares has had to give up a substantial ownership stake to public investors. Given that family control has been a central driver of success for many companies, few family businesses have been willing to relinquish that much ownership and such a degree of control. Further, bringing in outside investors and managers has been thought to risk disrupting the company’s culture and shifting focus from long-term development to short-term profits. Consequently, only eight percent of family businesses in the Middle East are publicly traded.

By lowering the minimum capital dilution percentage, the authorities’ objective is to enable family owned companies to bring in outside investors without giving up as much control. This change should enable more family owned businesses in Oman to partake of the advantages of public flotation, while mitigating its risks.

Read More...

Private Equity Opportunities for GCC Family Businesses

This article, written by Curtis partner Peter Stewart and associate M. Adil Qureshi of the firm's Dubai office, was first published in the December 2009 issue of the The Brief magazine. It has been reprinted here with the permission of the publisher. ______________________________________________________________ The slowing of the world economy and the restrictive credit environment has pulled back the curtain on many Gulf Cooperation Council (GCC) family firms, revealing structural weaknesses. However, the challenges posed by the economic crisis are not without opportunity. Indeed, the crisis provides strong impetus to reshape GCC family businesses in ways necessary to ensure firms’ long-term survival and success. For many family firms, private equity can provide an effective framework for accomplishing this goal. As the summer months passed, economists, business people and commentators speculated over the timeline of an economic rebound in the Gulf region. Such discussion looked at a range of economic indicators, including employment, oil demand, budget projections and inflation. In their commentary, one factor – the health of family businesses – seemed to be overlooked. Family Ties Family businesses are a vital part of the economic fabric of the GCC economy. Some estimates indicate family businesses conduct more than 90 per cent of commercial activities and employ more than 70 per cent of the workforce in the GCC. The defaults of the massive Saad Group and Ahmad Hamad Algosaibi and Bros (AHAB) earlier this year made it clear that the family sector would not emerge unscathed from the economic crisis. That controversy marked an end to loose credit practices regionally and exacerbated restrictive credit conditions. The most obvious benefit of private equity investment is liquidity. There has been much talk of the appeal of family firms’ holdings to the many private equity firms operating in the GCC in recent years. Such firms could purchase unproductive units, use sector-specific expertise to retool them and potentially combine them with other units, unlocking synergies. If family firms can make the difficult decisions necessary to part with such business units, private equity could provide them with badly needed cash while making a profitable return. The benefits of private equity, however, may go beyond liquidity. Private equity firms can bring to bear the managerial expertise necessary to reshape family businesses by helping to pare down unproductive business units, boost productivity, raise funds, reform corporate governance, professionalise functions, and institute new systems and processes. These steps can prove crucial to securing the prosperity of the company. If permitted to invest in the company and to influence management, private equity can reshape the business for future growth. There are a number of steps family firms can take to increase the likelihood that private equity firms will invest in their business. The first of these steps is formalising corporate governance in line with international standards. The process of strengthening internal controls, risk management mechanisms, and monitoring and reporting frameworks can reveal weaknesses and valuation affecting issues while instilling enhanced managerial discipline. Additionally, firms can recruit independent non-executive board members and bolster the influence and accountability of their boards by instituting typical board committees with written charters, policies and procedures in line with international standards. Separation of Powers Perhaps the most significant governance step that family firms can take is to separate ownership and management. Top management and the board of directors should coordinate with, but be independent of, the family. Such a measure would typically serve to encourage professionalization of management, avoid succession conflicts, and increase transparency. The improvement of governance and the professionalisation of management prior to a deal should also facilitate the implementation of new systems and processes after a deal. Further, the implementation of standard practices, including accounting practices, will signal to investors the reliability of a firm’s figures and improve the likelihood of a successful transaction and later exit. Lastly, family businesses in the GCC should be flexible and creative in structuring private equity deals. While often majority and controlling stakes cannot legally be sold, GCC family businesses should be open to transferring larger stakes and more control in order to allow private equity investors to realise expected returns. Structures involving hybrid securities, debt, dividends and warrants can be considered. Family firms may also consider allowing private equity investors the chance to exit through partial IPOs. Nasdaq Dubai has recently decreased its minimum offering requirement to 25 per cent in a bid to encourage this behaviour and entice more family businesses to offer shares for public trading. Family firms have an honoured legacy in the Gulf for pioneering industries, exploiting new opportunities, and creating wealth. Today, many of these pioneers stand at a crossroads. Will they respond to current pressures by continuing with old ways of doing business, or by embracing change that will enable them to meet the challenges of an increasingly global economy? For many family firms, private equity investment can be an effective catalyst for change helping to meet those challenges.

Read More...