Reviving Pakistan IPO market

Govt has been the biggest beneficiary of an expanding capital market.

A vibrant IPO market remains critical for a successful capital market in providing depth in expanding investment opportunities. However, in the backdrop of a slump in equities globally, price discovery has remained limited. Over the last year, the KSE-100 Index has returned 18% with the return anything but broad based.

Out of the 32 listed sectors, only a handful (six sectors) managed to outperform the market. While this remains a broader challenge for the IPO market, the recent string of IPOs over the past couple of years have done little to shore up investor confidence.

This underscores the need for continued improvement in due diligence exercises while also indicating the need for high quality companies to step up to the IPO market.

With market valuations relatively low, quality companies should take the current circumstances as an opportunity to prepare for listings. Companies with sound business strategies, corporate governance and consistent payout policies will likely end up with premium multiples in the medium to long term.

This requires a paradigm shift in corporate culture away from the largely prevalent “Seth Culture” where companies would be required to invest in the longevity of the business leading to institutionalisation/corporatisation of the company. The government of Pakistan has emerged as the biggest beneficiary of an expanding capital market through a string of successful listings (inclusive of Global Depository Receipts) where improved transparency and business efficacy have led to premium valuations. That said, for the benefit to be broader, the government should consider providing a more favorable fiscal regime to listing. For instance, Bangladesh and Cambodia have both facilitated local IPO markets by providing fiscal benefits in the form of either lower income tax for a defined period and or lower withholding tax on dividends.

The government’s recent initiative of creating public-private partnerships to finance new large-scale infrastructure projects will be immensely benefited if the companies are listed. The government should consider listing big infrastructure projects on the local bourses as well.

The benefits of listing are many, such as access to capital to fund growth, creation of liquidity and exit for current owners (particularly non-executive family members) and enhanced loyalty of employees.

In order to further facilitate successful Initial Public Offerings, a structuring with private equity partners in the pre-IPO process has proven to be successful. Adding the profile of a private equity partner enhances general public and investor confidence providing reasonable comfort that good corporate governance and comprehensive due diligence is in place. Listing of composite companies via an established fund like a medium size enterprise fund which would acquire a smaller stake in promising medium size growing enterprises (3-5 companies) to be listed on the exchanges. This would have many benefits. For example each enterprise will not require separate listing but corporate governance standards will improve. The investor’s risk will be hedged by diversification. It will also develop a market for venture capital/mutual fund through listing rather than private equity.

The benefits of listing are not only confined to the company raising capital but are broad based from the small retail investor who gains access to viable investment opportunities all the way to the secondary market which experiences an increase in depth.

The writer is CEO of AKD Securities

Published in The Express Tribune, October 24^th, 2011.