It is heartening to see a campaign, aimed at encouraging fresh listings, now enter its fifth year. Together with all capital market entities of Pakistan, once again the ISE is proud to join hands to organise the Annual IPO Summit-2015. This incredible initiative by South Asian Federation of Exchanges (SAFE)-an industry platform of the South Asian region, is investing its creative capital to enable growth in the capital market of Pakistan.
The Summit is a very precise idea that single-handedly caters the needs of those private companies which are considering going public. Serving as a unique platform for the financial advisors, investment bankers, underwriters, stock exchanges, governance experts, valuers, lawyers and all other stakeholders, the IPO Summit assembles all these constituencies together to raise awareness about listing.
Furthermore, the bluechip companies, which are now a benchmark to new, small - medium enterprises, are enlightening audiences about their extraordinary journey of success. It is noteworthy that with the improved regulations and supportive mechanism, it is now easier for the potential companies to become publicly listed companies in Pakistan. There can be immense advantages to going public, which translates into an annual growth as well as the potential to generate hundreds of millions in revenue per annum.
I wish SAFE all the success in the world, and hope to see this initiative prosper far beyond expectations. Mr Sajjad Anwer, CFA, Chief Investment Officer Mr Sajjad Anwar joined NAFA in June 2007 and gradually progressed to the position of Chief
Investment Officer. Mr Sajjad has strong understanding of capital markets and believes in a
disciplined and fundamental-based investment approach. He has strong abilities of thinking strategically and leading teams. At NAFA he is heading the team that has successfully launched and managed several mutual funds and portfolios in diverse categories such as equity, fixed income, Shariah compliant and capital protected structure. These funds have been consistently amongst the top performers. Mr Sajjad Anwar is MBA in Finance and Chartered Financial
Analyst (CFA) Charter holder. Prior to joining NAFA, he was working as Manager Strategic Risk Management with Army Welfare Trust (AWT) where his main responsibilities were Project Appraisal, Mergers and Acquisitions and Risk Analysis of ongoing projects. He also served Shifa Foundation as Asst. Manager Finance & Accounts. In addition to this, he has over three years of teaching experience where his areas of interest were Corporate Finance; and Investment
Analysis and Portfolio Management. Role of Mutual Funds in the Context of Initial Public Offerings (IPO) Initial public offerings (IPOs) play multifaceted role for the issuer, capital markets, intermediaries and the broader economy. With respect to the economy, IPOs improve circulation of wealth and enable efficient allocation of capital, thereby generating employment and increasing the productivity of the capital. For issuer, IPOs help enlarge equity base and provides access to cheaper capital, prestige & Image, potential to attract better human resource, and more importantly value realisation/optimisation. From the capital market perspective, IPOs contribute to the development of capital markets via new investment avenues and widening the Investor base, increases breadth and depth of the market, and improves global image. As for intermediaries, it generates revenue stream, attracts new clientele, improves prestige & Image, and generally offers an attractive opportunity of hefty capital gains.
Experience indicates that the Issuer prefers participation of institutions including Mutual Funds in the IPO for several reasons. First and foremost, it helps in price discovery - Signal for the broader market participants, notably the retail investors. Strong participation by Mutual Funds is generally considered an endorsement of the fundamentals driven 'smart money'.
Institutional investors including Mutual Funds tend to have longer investment horizons as compared to individual investors, which often results in better price performance in the long run. Mutual funds are major user of sell-side research, and IPOs that attract interest of Mutual. Funds attract sell-side thereby boosting the interest of broader market participants in the post- IPO period.
While IPOs generally present an attractive investment opportunity for making handsome profit in a short period of time, following factors are considered vital before making an investment decision. 1. Fundamentals ie economic outlook; industry prospects; and company's financial position and performance (measured via key ratios such as ROE, ROA, EBITDA Margins, and Du Pont analysis etc), relative valuations (P/E, P/B, EV/EBITDA etc.), and fundamental valuations, (discounted cash flow method). It also entails analysis of management quality and integrity.
2. Constraints: liquidity of the security and size of the offer, regulatory and client specific constraints, and shariah compliant status of the security for investment consideration for Islamic Funds.
3. Reputation of all the stakeholders involved in the process including lead managers, members of consortium, advisors also holds the key for the success of an IPO with respect to investors.
Following is the comparison of Global and Local Trends in IPO
Global Trends Local Trends
1. There are several Mutual Funds (MF) including ETFs that specialise in the IPO market
1. There are no specialist IPO funds in Pakistan, primarily due to dearth of IPOs and their risky nature
2. Mutual Funds are allowed to invest in Pre-IPO despite lock-in period.
2. Mutual Funds (MF) are not allowed to invest in Pre-IPOs due to lock-in period.
3. Higher transparency and limited investment options in the regular market make almost all IPOs the 'new hot investment' for MFs
3. Lack of transparency and availability of investment options in the regular market limit MF interest in IPOs.
4. IPO market is most vibrant in the U.S where the IPO activity during the last year alone was equivalent to Pakistan's total stock market capitalisation
4. IPO market remained dull post the 2008 crisis, and activity has just recently picked up with upturn in economy.
We conducted a Price-to-Book ratio (P/BV) versus Return on Equity (ROE) analysis of top-100 listed companies on the local bourses. The results reveal that companies with high ROE attract high P/BV. As the table below shows companies that earn over 30% ROE are currently trading at around 4 times their book value. On the contrary, companies that generate below 10% ROE are valued at 1.5 times their book value. Thus, listing through IPO helps good companies to unlock their true value.
ROE Range
Companies
Count Based on our study and experience of local and Global IPO markets, we recommend the following to unleash the potential that the IPO holds:
IPOs can play a decisive role to unleash tremendous potential that any vibrant capital market holds. However, the modern capital markets entail best practices, securities laws and regulations to win investors' trust. To enable mutual funds to play a fuller role, regulations need to be amended to allow them to invest in Pre-IPOs as several IPOs seen during the recent period also had their Pre-IPOs. Regulatory framework also needs improvement with respect to oversight to ensure transparency in the entire process to win the trust of the investors and overcome any impediments and obstacles facing potential issuers.
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