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Mon 23 Mar 2015 10:27 AM

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Few MidEast family businesses to float in 2015, predicts PWC

Many are also struggling to recruit good quality CEOs due to a perception by candidates that family members will interfere too much in the control of operations

Few MidEast family businesses to float in 2015, predicts PWC

Just 15 percent of family firms in the Middle East plan to sell all or part of their business in the short to medium term, according to research published on Sunday.

Many are struggling to recruit new talent and draw up a viable succession strategy.

PWC surveyed 44 family businesses in the Middle East as part of a study to document the aims and concerns of 2,400 family businesses across the world.

The research, conducted between August and October 2014, shows that 15 percent of respondents intend to sell or float their business – eight percent of those said they would list an IPO and the remainder said they would sell to private equity investors. 

More than a third (38 percent) of respondents said they intended to pass on ownership of the business to the next generation and a quarter said they would pass on ownership but bring in professional management. 

Amin Nasser, partner and leader of entrepreneurial and private clients at PWC, told a press conference on Sunday that family businesses are seeking to strike a balance between family interests and the need for increased professionalism and transparency in a competitive business environment. Many are worried about access to finance and want more rigorous systems in place to demonstrate solid governance to banks and other investors, he said.

A common theme among second or third generation family businesses is separating discussion of family interests and issues from the day-to-day running of the business.

However, he noted that while respondents were reasonably clear about succession plans when questioned, only 16 percent had a documented and approved succession strategy, with stakeholder agreements, conflict resolution mechanisms and entry and exit provisions.

At the same time, many businesses are struggling to recruit good quality chief executives because of a perception among prospective candidates that they would find it hard to gain sufficient control over the company due to interference from its founders.

Recruitment of talent continues to be the biggest single concern for Middle Eastern family firms over the next twelve months, PWC’s report says, stating that 34 percent cited this as a key concern in 2010, 45 percent in 2012, and 64 percent today. This is noticeably higher than this year’s global average of 49 percent and could in part be down to aggressive policies in many Middle Eastern countries to reduce the proportion of non-national employees in the workforce.

Meanwhile, EY’s IPO update last April reported that public listings of family businesses were becoming more popular in the Middle East, with highlights including Damac Group’s IPO of its Real Estate Developments subsidiary in November 2013.

But PWC’s report suggests few family businesses whose founders are still in their posts are likely to go down this path. Nasser said: “We’ve had a lot of interest from family businesses considering preparing for a flotation, but fewer mandates to actually implement one.

“The issue of IPO is definitely not off the agenda, but will lots of families do it? No, we don’t think so. And those that do will probably sell subsidiaries, not the holding company.”

Second or third generation family businesses, whose leaders are more progressive and welcoming of change, are more likely to consider a float or private equity exit strategy and to want to professionalise the business – they know investors will look for a well-managed and disciplined operation, the report said.

This is a “possible” reason why Dubai conglomerate Al Habtoor Group has yet to revive plans for a multibillion dollar initial IPO first ventured in 2012, Nasser told the press conference.

Ironically, the London Business School announced this week that now is a good time for businesses to go public. Its professor of finance Francesca Cornelli said: “There has been much speculation in the market about how the fall in oil prices affects the GCC IPO market.

“Broadly speaking, it’s easy to conclude that lower oil prices will make a less favourable environment for IPOs. As markets are irrational and follow momentum, the window for IPOs is generally closed during such conditions.

“However, times of high uncertainty can also result in better opportunities for the best firms to draw attention to their superior potential for growth, in particular because the real option component of the value will increase with uncertainty. The current IPO landscape in the UAE is in fact positive.”