Landscape of valuation services in GCC
Interview with Mr. M. R. Raghu, CEO, Marmore MENA Intelligence
What is the market size of private firms in GCC?
Private firms encompass of any non-listed firms, these firms could be large family run businesses or small and medium enterprises. Private firms have great importance in terms of its contribution to the GDP for their respective economies and for employment generation. In the GCC, SMEs constitute close to 90% (i.e. about 1.5 million SMEs) of the total companies’ base. The sector has the potential to generate 22 million employment opportunities by 2022 in the region. As per a study by Crowe, SME market in the GCC could reach USD920bn in 2023. However, one needs to note that the region has a lot of successful family businesses as well with remarkably high market value.
What are the various reasons for a private firm to hire consultants to value their businesses?
As businesses grow, they are often looking for funding to expand their business, this is when an organization approaches a financial institution for loans. Even start-ups are always hungry for funds, as they need corpus to penetrate markets, expand production and take business to the next level. Typical valuation requirements for start-ups stem for subsequent rounds of funding as well. Other requirements could be for mergers and acquisitions where in a company is evaluating options in the market for a possible takeover. Conducting a detailed valuation study addresses the above needs, it also enables a company to recognize a realistic valuation of their firm. Sometimes the conflicts between partners, default on payment obligations and winding up of a business also facilitates a detailed valuation study. Valuation studies are also required by private companies for stake sale.
What are the key challenges in GCC Countries in terms of valuations?
GCC region is catching up in terms of more corporates tapping into equity and bond markets for funds. However, many of the large family businesses are not that active on this front. Hence finding relevant valuation comparable for these private companies is often a challenge. Other issue prevalent in the market is that for most of the mergers and acquisitions transactions in the private space valuations are not reported. Disclosure is another key pain point in the region. Corporate disclosures are not uniform, leading to partial disclosures or no information at all. This poses a significant challenge for consultants while attempting to value a company. The willingness to share information in public is low and hence the visibility. Another issue is in the way firms conduct accounting and reporting. Many firms even in the listed space are not reflecting the fair value of their holdings, which makes it even more difficult for financial analyst to value these firms.
How is the landscape changing, and what more can be done?
The good news is that there are many local and international players in this space, and the race is further picking up and should lead to adequate competition. A general tendency within GCC firms is to engage only with the selected top International players, while this practice could be more expensive as these firms might be charging a lot of premium for their services, it is also a deterrent to the prospects of other international and local valuation firms. Healthy competition should be encouraged as this will eventually pave way for sustenance of these valuation firms and would also facilitate cost efficient solutions for the clients.
How has Marmore helped private organizations with financial and valuation consulting?
Over the years Marmore has helped many clients with valuation services. For one of the clients, Marmore did a valuation exercise for a listed utility company. The issue at hand was that the management was reporting all of its assets and investments on historical book value basis, while the assets and investments had grown significantly over time and didn’t reflect the true value of the company. Furthermore, a subsidiary of the company was even larger than the company itself. Marmore was hired by an investor in the utility company for valuation. Careful evaluation of all the subsidiaries were carried out in terms of line of business each operates in and accordingly each of them were valued. Our valuation report brought out the hidden value of the company in assets and investments, and was presented to the management of the company to make necessary disclosures on the market value of these investments.
For another client we were engaged to value a non-listed company which recently closed a bulk deal. Marmore used its expertise and identified the right valuation of the company by using multiple valuation methods, the client used the valuation report to negotiate better terms with the company. A particular case deserves a special mention, wherein for a listed company, the Government made some significant changes to its revenue recognition model. This change had a long-term impact on the company’s performance and valuation, but given the complexity of the new laws, a proper valuation exercise could not be performed as the market participants sought waiting for more clarity from the management. Marmore stepped in and provided detailed analysis of the new laws and its impact on the company valuation and performance. Marmore’s effort was well appreciated by the client and made the investment call for the client more obvious.