IPO market in KSA – current performance
Although the number of IPO transactions, which took place during the first six months of 2018, was lower than the expectations, the situation is expected to significantly improve during the second half of the year. The regulatory reforms recently implemented in the Saudi market, the significant number of large entities planning for an IPO and the expected reclassification of KSA as an emerging market by the MSCI are all factors, which will boost the IPO market. In addition, Public-private partnerships (PPPs) are becoming more popular to attract private investments, particularly in the real estate market since both privatization and PPPs are becoming necessary to reach the desired level of quality-of-service and governance. In addition, although the situation of the market is expected to improve in the upcoming periods, the decision to go public always needs to be carefully contemplated.
What are the challenges?
To decide whether to go for an IPO is considered one of the most challenging and common decisions faced by the companies in KSA. At a first glimpse, IPO looks attractive particularly when it is contemplated only as an easy access to broader financing resources. And although motivations to go public vary depending on the company’s financial performance and ideology, gaining access to more financing to support business growth is always a key goal.
The key problem faced by numerous companies contemplating an IPO is the underestimation of efforts, time and readiness for such a transaction. Furthermore, in many cases, there is a lack of an accurate understanding of the potential outcome of the IPO which is only regarded as a financial strategic decision. This fact always leads to companies wanting to pursue IPO without properly assessing whether the requirements of such a transaction are easily implemented. Also, the management of these organizations ignores the fact that the adaptation of such requirements is not necessarily healthy for every company or business environment
Having performed a significant number of due diligence exercises in connection with IPO transactions, I noticed that in many cases companies express an irrational enthusiasm to go public without considering the following factors:
- The condition of the market: although the company might be performing well, the performance of the market needs to be properly evaluated. This allows the company to assess the size of the potential business opportunity and decide whether this is a good timing to go public.
- The readiness of the company: public companies are required to abide by a significant number of laws and regulations. Hence, any company planning to go public needs to ensure that all these institutional, administrative and financial requirements have been successfully implemented and tested. Examples of such requirements include building a strong governance structure, having an experienced executive management team and building a strong marketing team able to communicate with the investment community.
- Predictability of business: the company might be performing very well currently but what about the future? Public investors love predictable quality earnings and when the company can prove that its future is associated with success, the investors will be convinced to buy its stock, which makes the IPO-ready stamp easier to obtain.
- The differentiation of business vision : people will not be interested to invest in a company offering a mundane business vision, particularly if the market is already saturated with investors. So the difference that the company is bringing to the market is a key factor.
- Transparency: any listed company will be completely exposed to the public on all types of platforms. Also, its information will be disclosed on a regular basis which might affect its stock price. So it’s not only whether the company is performing well and has what it takes to be listed, it is also about whether the company is comfortable to share its performance and news with the public.
The aforementioned factors are only examples of an extensive checklist which needs to be contemplated by any company planning to pursue an IPO. The biggest and most common mistake would be considering the IPO as a simple beneficial transaction which will improve the financial condition of the entity. IPO is a transformative decision which will shape the business ideology, the culture, the people and even the technology. A listed company is expected to deeply understand the behavior of the law and the public in order to be able to manage the relationships and the obligations which will have a long-term impact on its reputation and value.
Aiming to obtain the “IPO-ready” approval signifies that the company is sending a clear and strong message to the public that it is a successful organization well equipped with a strong governance and vision which guarantee an accelerated, promising and consistent growth. By getting its IPO approved, the company is gaining a huge credit not only for what the business is about but for how the business is being performed and managed. In addition, while many IPO candidates believe that getting their IPO approved represents the end of the road, it is nothing but the beginning of the journey.