Trust in the corporate world

In the world of private equity, trust is a force multiplier: trust brings you better deals in the origination stage. Trust enhances value and efficiency during the lifetime of an investment.

And trust attracts buyers willing to pay a premium when the time comes to exit and pass an investment into new hands. How do you create trust in the corporate world? It's hardly rocket science: trust is the product of good corporate governance.

In today's climate of rising competition from investment banks, strategic investors and other private equity firms for the lucrative business opportunities in the Middle East and North Africa, it's one of the best investments any company can make.

It would seem obvious that hometown firms have the inside track on the best regional deals, but competition could change that. In fact, global giants have strong appeal to MENA businesses looking to sell or attract new investment.

One of the chief attractions of going with a foreign partner is the assumption of trust: It's simply easy to assume that large multinational investment houses that must answer to shareholders are more fundamentally trustworthy in their dealings and capable of posting better returns.

The reality is that Western firms - the best of them, anyway - are seen as well-run corporations that follow strict codes of ethics and corporate governance. To maintain their competitive edge, Middle Eastern players must adopt similarly solid codes of governance and conduct.

As they do, regional firms will attract not just new foreign capital and the pick of local opportunities, but will also be able to expand beyond their present geographical footprints.

The region's private equity firms must ensure that they offer unique competitive advantages, chief among them being deep insights into local markets, a solid base of contacts that serves as an unparalleled origination network, and an ability to hire top talent to run portfolio companies in each of the industries in which they invest.

Good governance isn't merely about obeying the letter of the law, but also about institutionalising principles of fairness, openness and transparency - and that includes a separation between management and stakeholders.

Strict internal controls and reporting standards are a must for every portfolio company and its subsidiaries.

Firms must demand that results and reports be made consistently and transparently to all parties with a vested interest - from management and board members to shareholders.

Today, as more and more family businesses are looking to raise funds, sell out, restructure or offload non-core assets, many of them are turning to private equity firms.

To remain attractive, the businesses too must institutionalise decision-making and reporting structures that emphasise transparency and performance. Good corporate governance and the trust it creates are no more optional for private firms than they are for listed companies.

Indeed, good governance makes a quantifiable monetary difference at every stage in a private equity firm's deal cycle. On the origination side, good governance makes one a trusted partner who can easily obtain the backing of investors and financial institutions with lower costs of capital.

Best of all, institutionalising the principles of good corporate governance at subsidiary companies makes it possible for private equity firms to exit their investments through IPOs or trade sales at a premium.

Worldwide, two-thirds of investors are willing to pay an average 11% premium on shares in a well-governed company, according to a recent McKinsey global survey.

If that's not the ultimate argument in favour of creating a climate of trust and transparency, I'm not certain what is.

Ahmed El Shamy is managing director and chief financial officer at Citadel Capital.

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