It is a privilege for Pakistan Stock Exchange Limited (PSX) to join hands with South Asian Federation of Stock Exchanges (SAFE) and co-host Pakistan's IPO Summit 2016. This initiative serves as a platform where companies and businesses contemplating to embark upon expansion have a unique opportunity to interact with financers and investors outside the conventional setup of banks and lending institutions. SAFE is playing a pivotal role in the economic growth of the country and development of Pakistan's Capital Market by bringing together these key groups.
Major concerns expressed by sponsors of privately held and family owned businesses revolve around the pros and cons of raising external capital from public investors through listing on the stock exchange. Many sponsors express reluctance to list as they have the perception of being exposed to more regulatory and disclosure requirements along with need for external directors which may raise complications and issues ultimately distracting them from their core business.
On the one hand, these reservations have some validity as not all companies should list. Certain companies only require minimum capital to support their trading oriented business which can be financed via short term sources of finance such supplier credit, bank working capital credit facility, invoice discounting, etc. On the other hand, the requirement for long-term finance arises for companies that require capital for long duration such as 5 years or more. Usually, companies opt for a combination of long-term debt and equity to have an optimal capital structure with minimum cost of capital.
In view of above, there are variety of situations where attaining external capital and going public (ie listing) can bring substantial benefits for many sponsors of privately held companies.
The major benefit of listing is that it facilitates rapid growth by augmenting the financing needs of the company. Many companies are experiencing surge in their sales belonging to large numbers of industries and sectors ranging from pharmaceuticals, engineering, consumer goods, food, education, construction, to name a few. How can one say that the growth in these companies is substantial when the real GDP has grown by only 3.5% - 4 % in the last few years? It has been estimated that the undocumented economic activity is approximated 50% of the documented official economy. Thus, if the official GDP in Pakistan is US $284billion, then the effective GDP is likely to be US $426billion. It is envisaged that this growth would be further amplified by the demography of Pakistan. Pakistan has sixth largest population in the world consisting of 195 million people and 50% of this population is estimated to be below the age of 25. This demographic advantage, coupled with a growing middle-class estimated at around 40 million, means that the country is entering a phase of high consumer demand for everything ranging from housing (cement) transportation (cars & motor cycles), electrical and electronic appliances, health care products, education facilities, packaged food products, financial services, branded clothing, etc. It is this demand that the companies listed on PSX satisfy. As a result, their sales and profit growth remains very strong. Indeed, the Return on Equity (ROE) of companies in KSE-100 Index has been 22% on average in the last four years, which is one of the highest in the Asian region.
While many business persons are content with their progress which is their own rightful choice, there are a small group of sponsors who exhibit immense vision, passion and capability to outgrow the challenges of Pakistan's business environment and succeed. These are the entrepreneurs who have confidence in their performance and are willing to grow their businesses by using external capital (both debt and equity). To name a few, groups such as Nishat, Lucky, Dawood and Engro are amongst those that have utilised public market opportunities when they were relatively smaller few decades ago. These groups took the opportunity to create wealth and supplement their growth through the capital market. These are Pakistan's business leaders and this is what the SAFE is trying to highlight: if you have the vision to harness opportunities you can raise capital similar to these companies to expand your business and amplify its growth.
IPOs enable companies to relatively easily raise finance without collateral requirements that can become a hurdle for business operations. Moreover, IPOs do not involve any repayment of principal so the business will be less under pressure through equity financing in situations when sales take a dip. Sometimes heavy borrowing burden could result in cash flow problems & possible bankruptcy. Thus, an IPO provides an attractive source of long-term financing.
Another major class of businesses that can use Pakistan's capital markets for growth are international joint venture companies. These foreign joint ventures usually look up to their foreign source of funding primarily for expansion. However, given the aforementioned opportunity, these joint ventures have a better stand in contrast with the potential new comers as they have local knowledge, experience and marker understanding which newcomers will take years to achieve. Hence, those joint ventures contemplating to expand can seek finance through domestic capital market thereby creating a large base of domestic support constituencies. These companies have an edge of transparency and governance and can negotiate better with suppliers and business partners because they are publically listed.
Listing is also favourable in various personal situations of sponsors. For instance, succession related disputes whereby sponsors handover their businesses to their children and conflict of opinions over business decisions and sibling rivalry can derail the founders' core vision. There are many cases where this critical family conundrum either breaks up the business into smaller units which may or may not have economic viability and, in the worst case, destroys the business altogether.
In view of the aforementioned problems, listing on the stock exchange facilitates family owned private business by enabling various solutions that address complex problems of generational transition in the sponsor family. Benefits of listing on the exchange for such companies allows them to ascertain a market value of the enterprise in an open and transparent manner. Through this medium, family members who may lack requisite skills or do not wish to participate in the business operations, can exit their shareholding at a market determined price, which reduces potential conflicts amongst family members and at the same time, fulfils their funding requirements. If the new generation has the right vision and capability and envisages to develop relationship with investors in order to take their enterprise to next level of growth, listing and diluting a small portion of sponsor' equity via listing on the Exchange can prove fruitful for them.
Few of the key benefits for private sector enterprises of raising external capital through listing on the Exchange were stated above. Public Sector Enterprises (PSE's) can also have access to long-term funds via securities markets, especially the debt capital market which provides a secure and convenient secondary market trading platform via PSX's Bond Automated Trading System (BATS).
This is all the more important now in view of the China Pakistan Economic Corridor (CPEC) initiative where huge infrastructure outlays are required. Not only can government owned entities or joint venture companies involved in the CPEC initiative avail of public funding from the capital market but companies throughout the value chain, from construction sub-contractors, to component manufacturers, to materials suppliers - now have access to long-term debt and equity funding from the capital market. Even companies that rely heavily on bank borrowing will now need larger equity base as the huge contracts they will be bidding for in the infrastructure sector will require greater equity capital base in order for them to obtain bigger amounts of bank loans. This equity capital can relatively easily be obtained through IPO's (Listing) on the stock market.
In conclusion, the benefits of listings usually outweigh any perceived costs for businesses and sponsors who are experiencing rapid growth, have successful products as well as the vision and capacity to significantly to develop their company will discover that listing on the stock exchange can open a whole new world of opportunities for them.