x Abu Dhabi, UAESunday 23 July 2017

Is there a glimpse of the future in Aabar's decision?

The appropriateness of plcs for the region is increasingly open to debate.

Aabar's move surprised analysts.
Aabar's move surprised analysts.

Aabar Investments's proposal to consider delisting its shares to go private surprised market analysts on Monday, but it is part of a growing trend away from the traditional public limited company model, especially in the fast-growing economies of Asia and the Middle East. It is too early to call the death of the "plc" conclusively. The tried and trusted methods of corporate organisation may remain the preferred form in Europe and the US for many years. But whether they will still be appropriate for Chinese or Indian or Gulf corporations in the future is increasingly open to debate.

If Aabar's plan comes off - it is still just under consideration - it will be a significant straw in the wind. Perhaps it is about time the world comes up with something more efficient than a 400-year old structure that served business well for much of the time but looks increasingly anachronistic nowadays. The British and the Dutch were the first - in the 1500s - to come up with the idea of the "joint stock public company". Both used the model to finance and run the trading companies that exploited their commerce with the rest of the world. Their respective East India companies became huge organisations, the first modern corporations, ending up as virtual governments in places such as India and South East Asia.

The advantage of the model, which remains its unique attraction today when the system works well, is that it allows entrepreneurs access to capital and simultaneously allows investors access to money-making opportunities. Matching the two needs is the raison d'etre of capital markets the world over, and the "plc" has proved to be an efficient way of doing it. Investors buy a "share" of the profits of the companies, and these shares are traded on stock markets, reflecting in their trading price the company's profit potential.

That's the theory, anyway. But modern corporations have grown so big and complicated, and modern markets so sophisticated and vulnerable to external factors, that the pricing mechanism does not always work. The market often gets it wrong. There was in London in the 1980s a textbook case of how markets sometimes fail to understand a company's potential. Sir Richard Branson, a dashing entrepreneur who had founded the Virgin brand, took his company public, issuing shares on the London Stock Exchange. They languished, and after a relatively short period, Sir Richard cancelled the group's public listing, bought back the shares, and returned to "private company" status.

The move was controversial at the time. Sir Richard's complaint was that the market did not understand his strategy or the value of his brand. The two decades of growth since then, during which Virgin has become a ubiquitous and profitable brand, suggest that he was right and the market wrong. Interestingly, Aabar is now a major investor in Virgin Galactic, Sir Richard's space travel business. Perhaps some of the Virgin philosophy has rubbed off on the Abu Dhabi firm?

Being misunderstood by the market is one motive for going private, but there is a far bigger factor at play in the modern world. The growth of the private equity and hedge fund sectors has meant that stock markets are no longer the only, or even the most efficient, way for a corporation to raise investment cash. By hooking into the private equity network, companies have access to the vast billions that wash around the world's great financial centres. Why go to all the trouble of a public share listing, with the regulatory and administrative responsibilities involved, when smart money is ready and waiting to back good business ideas in the private sector?

The temptation to ignore the public sector is increased in the Middle East and Asia, where governments have played a much bigger role in business finance than in the West. The world's sovereign wealth funds are huge financial organisations, commanding billions of dollars of investment. But actually they are simply very big, state-directed private equity groups. For a company such as Aabar, access to these sources of investment capital may prove far more attractive than a public listing. The Abu Dhabi company already has a big state-owned investor in the form of the International Petroleum Investment Company, which owns 70 per cent of the shares. It has been supportive of Aabar in the past and will no doubt continue to help finance its growth plans, which extend far beyond its energy-sector origins. For example, Aabar is a major shareholder in Daimler, the German motor giant.

The tricky part for Aabar comes next. It has to buy out the 30 per cent of shares traded on the Abu Dhabi Securities Exchange at a sufficiently attractive price to compensate investors for the loss of their public-traded equity. In the current depressed state of Gulf markets, this will require some fine calculations by Aabar's financial advisers, and perhaps some old-fashioned generosity by the company. Sir Richard got this aspect of his manoeuvre wrong in the 1980s and has had a tetchy relationship with some investors ever since.

With Europe and the US still wedded to the traditional market structure, it is premature to forecast the end of global stock markets. But the Aabar situation will be watched closely by the rest of the world as it searches for a post-western form of corporate organisation. fkane@thenational.ae