Emerging Markets Business Summer 2017 | Page 60

60 A FAMILY AFFAIR EMB 61 THE TRANSITION FAMILY MEETS PRIVATE EQUITY THE PATH TO IPO Saudi Arabian jewelry company, L’azurde, has traveled a long path from family-owned and single store entity, to a multi-segment, publicly-traded firm. It started life as a family business in 1980, in much a similar manner to many other companies in the Arab world. Its first establishment was a modest, 16 sq. ft. jewelry workshop, but by 2008, L’azurde’s owner, Al Othaim Holding Co., had grown the company revenues to US$500 million. The following year, Bahrain and London-listed private equity group, Investcorp led a consortium of investors to buy 70 percent. The change in control involved a change in chief executive at the company, and marked a significant step on L’azurde’s journey to life as a public firm. Selim Chidiac, the current CEO, was brought in from the leadership of Red Bull North America to introduce corporate governance processes and prepare the business for exit through an initial public offering (IPO). Under his watch, L'azurde became the first majority private equity-owned business in Saudi Arabia to execute a successful IPO and list on the Saudi Arabian stock exchange, Tadawul. BY KARTHIK KRISHNAN EMERGING MARKETS BUSINESS SUMMER 2017 ISSUE NO. 3 Like many family-owned businesses, L’azurde felt the need for greater corporate governance and restructuring as it grew. Often, family firms—especially those now in the hands of young generations—feel they lack the experience required to grow their business to the next level. In particular, family-owned businesses can lack the transparency, financial reporting controls and governance structures required to help them scale up to the next stage of their lifecycle. In the case of L’azurde, this recognition led to private equity (PE) investors joining the investor base. The western PE model centers on buying and improving the operational performance of the target firm. As a result, a main focus of PE investors is corporate governance and enhancement of operational efficiency. In many firms, this involves necessary and sometimes significant restructuring, particularly when they are not doing so well. Overall, however, the private equity markets in the Middle East and other parts of the emerging world are still at a nascent stage—a reality which perhaps explains why L’azurde constitutes the first PE backed IPO in the Middle East and North Africa (MENA) region. The immaturity of the region’s PE market poses a number of challenges. The legal landscape is not ideal for a private equity player in the Middle East, particularly regarding bankruptcy law, while a shortage of exit opportunities can deter PE investors. Moreover, family-owned firms, which constitute the majority of firms in the Middle East and other emerging markets, are usually reluctant to bring in outside investors and management changes. However, despite these difficulties, the market in MENA is growing, with PE deals increasing from 66 in 2013 to 175 in 2015. The stable economic trends and potential for significant growth in Saudi Arabia and the Middle East more broadly make the region fertile ground for PE expansion. THE FRICTION POINTS In L’azurde’s case, Selim Chidiac was successfully brought in as CEO by the PE investors to oversee the transition from a family-run business, to a more professionally managed company. In other firms, however, such a move can create notable frictions. In a family business context, there are usually multiple family members holding ownership stakes in the company, and these members may not feel the same way about bringing in outside investors who can disrupt the way things work. Outsiders might come in and change operations, processes and governance mechanisms in ways that many family stakeholders may not understand or be comfortable with. Another concern is that of control: bringing in outsiders can dilute the controlling stake of family insiders. This may result in worries about the legacy and the long-term wealth of the family. Likely loss of ancillary benefits of control, including having control over hiring and management decisions, is also a concern. What’s more, it is important to remember that family members are not always the only stakeholders in a firm— and herein lies another challenge for family businesses in transition. In L’azurde’s home of Saudi Arabia, banks are significant lenders to large, family-owned firms. Part of the reason for this stems from the lack of banking competition in the Kingdom. According to a report by the Jeddah Economic Gateway, 85 percent of the market is dominated by 11 commercial banks. This prevents the need for Saudi banks to take the same AT A GLANCE How should family-owned firms in emerging markets navigate the tricky decisions involved in management professionalization and public listing? What drives a company’s decision to sell its shares in public markets? Are these drivers motivated by the orientation of its shareholders, or something else? Here, we turn to L’azurde, a luxury jewelry design, manufacturing and distribution company based in Saudi Arabia, for answers. kind of risks observed in more competi- tive banking economies. As a result, they often take the least amount of risk by lending to large, family-owned business- es whose members they are familiar with. However, with the arrival of new private equity investors who typically change management teams, banks become nervous because their familiar credit risk management channel (family owners and managers) gets disrupted. And it’s not just banks—a company’s existing board members can become nervous too, when significant manage- ment changes start to be implemented. As a result of these complexities, such firms are less likely to be candidates for going public, which in turn creates issues for their private equity in vestors. Exits, either through sales to other companies or IPOs, are key sources of liquidity for PE firms, yet many family businesses lack the strong corporate governance mechanisms and accountability controls necessary for a successful IPO. Fixing these issues is often a key focus. » EMBreview.org