The year 2015 will witness initial public offerings (IPOs) of state-owned companies as well as privately held ones. We forecast the latter will take place during the first half of the year, whereas state-owned companies have yet to meet internal requirements, notably approval by their relevant governance bodies. This includes finalising the terms of the listing, such as the advisers that will be used; the valuation method that should be employed; required documentation; and the percentage of the company to be offered.
This new era will call for better performance and greater transparency from companies heading for an IPO, with managers held accountable and hopefully compensated for their performance. How can we further encourage the private sector? For the time being the legal and tax frameworks surrounding the IPO process are rather generous, as evidenced by the treatment of capital gains and the partial exemption for corporate income tax, which provide ample incentives. The concern lies in the lack of liquidity post-listing, as interest fizzles once subscription is concluded.
The long-awaited intervention of institutional investors, such as banks or insurance companies, will make a clear difference. A resolution is expected in 2015 allowing these investors to freely invest an equivalent of 1% of their revenues on the stock market, which promises to trigger a more dynamic pace of trading. Privately held companies will then have to decide whether going public is a better option than the status quo, whereby expansion and capital expenditure are predominantly financed by traditional bank loans.
Smart money like private equity funds could help with arbitrage. While the legal framework for private equity investment established in 2006 was a good start, it has quickly required adjustments to comply with changes in economic policy and the best practices of the international private equity industry.
Indeed, all of the initiatives organised prior to the 2006 framework failed to deliver the kind of social and economic impact that we have come to expect from the private equity industry. A five-to-seven-year horizon is sufficient to assess the internal rate of return of a fund, and prior initiatives should have been able to at least match sector growth.
Unfortunately, inexperience and an investment bias towards lending prevent current players from mirroring the performance of their peers. Indeed, foreign private equity funds have performed far better than domestic ones, though this should change with new initiatives. But how should this be remedied?
Private equity operates on a global scale; therefore, global rules apply, including a distinction between the general partner and limited partner bodies; a team with the requisite multi-disciplinary skills; a cross-border vision; and the alignment of compensation with investor returns. Private-equity-backed companies generally support a healthy pipeline of IPOs, and the relationship between private equity funds and capital markets should be encouraged in order to provide a natural exit for investments. This way, foreign funds will also look more favourably at local stock market exits.
Another key parameter for developing capital markets is the availability of trained and skilled talent. In 2011 the country’s Securities and Exchange Commission, with the help of the UN Development Programme, took measures aimed at specialised graduate training for a range of functions in both asset management and investment banking. The Association of Banks and Financial Institutions has also taken steps to develop financial analyst training and certification.
Merger and acquisition specialists should help build a track record of successful transactions that will encourage other companies to enter into transactions such as private placements with private equity funds or private investors ahead of an IPO. Indeed, these structures are more attractive in the context of successful precedents. Other actors, including lawyers, auditors and financial advisors, also have a key role to play in the industry, along with efforts to foster a more collaborative and efficient marketplace. The best is yet to come!
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