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