Andrea Chipman is a freelance journalist based in the UK.
A new law could see a wave of family business IPOs in the UAE, but analysts and legal experts say the change is also an incremental step toward a much needed modernisation of the region's business climate. Andrea Chipman reports …
A recent change in the law on IPOs in the UAE could provide a much-needed catalyst to open up local family businesses to foreign shareholders and more broadly increase liquidity in Gulf equity markets.
The decree by UAE President Sheikh Khalifa Bin Zayed Al Nahyan amends an existing companies' law to allow family businesses to float a minimum 30% stake in their companies in an IPO, down from 55% previously. Although those interviewed emphasised that they haven't yet seen the details of the law change, they were cautiously optimistic.
"One of the reasons why this law was implemented was to put some dynamism and energy into the IPO market after a difficult 2005–2006," said Amer Halawi, head of research at The National Investor, an Abu Dhabi investment firm. He added that the amendment, which investors have been anticipating for years, was likely prompted in part by regulators' efforts to expand the breadth and depth of the market.
It remains to be seen whether larger family-owned firms will take advantage of the amended law, said Andrew Tarbuck, a corporate finance partner and head of equity captial markets at law firm Norton Rose in Dubai. Both Halawi and Tarbuck noted that while a number of family businesses are rumoured to be interested in pursuing a listing in the wake of the rule change, none have yet announced plans to do so.
The Al Habtoor Group, with interests in construction, hotels and publishing among other sectors, is a large family-owned business that has been mentioned as a possible seller following the law change, but so far, only rumours abound.
The new decree is unlikely to kick-start the UAE's equity markets overnight, participants say. Given the tight-knit community of family businesses in the region, many are likely to wait for another company to make the first move.
"The problem is a chicken and egg situation as far as equity capital markets are concerned in the UAE – you need one IPO to encourage the others," said Tarbuck. "Whoever dips their toe in, you have to have others following or else you have a situation where liquidity doesn't improve."
In addition, Halawi pointed out, given the wealth status of many large groups, smaller companies might have more of an incentive to go to the market in the near future. Generally low financial leverage and high levels of cash in the economy, supported in part by buoyant oil prices and strong GDP growth, have helped the growth of family businesses.
"Companies [in the Gulf] generally have too much cash on their balance sheet – oil price levels are high and there is little leverage," he said. "My take on the whole financing issue is that companies over here have gone to market for the wrong reasons – to start up businesses, for increased visibility or as a means of increasing personal wealth, but not necessarily to finance the growth of an existing economic activity."
Contemplating a listing of even 30% of share capital will require traditionally secretive family businesses in the UAE to develop a level of transparency and Western-style corporate governance that many are unprepared for. From the critical lack of information and statistics to the absence of remuneration and audit committees in many UAE corporate structures, many have their work cut out for them.
A combination of these factors has underpinned the basic illiquidity of stock markets in Dubai and Abu Dhabi, those interviewed said. The strongest momentum has come from the Dubai International Finance Centre, an offshore hub that exists outside the UAE's legal jurisdiction and is home to the DIFX.
"It's not just one event that is going to dramatically change the market overnight," said Halawi. "It's a combination of changes which are feeding through to the market one by one. We as professionals think the [law change] will contribute to sustaining the market and making it more dynamic, but it's not the only thing that needs to take place."