Public Equity sector should follow the example of Private Equity firms in the changing economic conditions of the Middle East.
Dubai, UAE, 3 February 2008 – New research conducted recently by Booz & Company has found that the Public Equity sector would do well to follow the example of Private Equity firms in the changing economic conditions of the Middle East. Chief Financial Officers, the study found, now have a number of different challenges in their function, and must be considered as business partners actively managing value creation, and influencing strategy, governance and leadership.
The Middle East’s move to PE
The study found that Private Equity (PE), due to a number of factors, is growing in the region. The opening of regional markets to competition is ushering a wave of strong economic growth for the Middle East, and favorable economic conditions — including rising oil prices and maturing capital markets, have led to excess liquidity in the region — with the number of merger and acquisition transactions (M&A), rising to $105 billion in 2007.
“Another pivotal factor is the fact that MENA private equity volume has grown exponentially with more than $20 billion managed or committed by the end of 2006. In the first half of 2007, the average deal size was $149 billion US and this in fact is expected to increase. Investors increasingly recognise the benefits of private equity and with the trend towards privatisation and willingness to sell among family owned companies — conditions are favourable,” said Ghassan Hasbani, a Vice Principal with Booz & Company.
The study found that reports of successful MENA PE returns would prompt even more activity in the future, especially after current successes. “We found that successful private equity deals actually outperform the best publicly traded companies,” he added.
New challenges for the finance function
The opening of regional markets and increased investment levels are creating a new set of challenges for the finance function, the study found, which is changing the nature of the Chief Financial Operator’s (CFO) work. Such changes include privatization, new regulatory requirements, functional restructuring, the restructuring and review of operations, operating model optimization and business expansion.
“We are increasingly finding that CFOs are interacting with the CEO and focusing less on transactional activities — a marked difference from the CFO’s traditional role. While today, only 30% of the CFO’s role is to advise the CEO on strategy, revenues cost and corporate structure, in 18-24 months this role will increase to 63%. In contrast, where today 30% of the CFO’s role is to understand costs and drive out expenses, over the next 18-24 months this will decrease to only 10%,” Hasbani commented.
“In addition, the transition to ‘business partner’ typically involves more strategic activities, with a change to an external focus from an internal one, and a move to more strategic business orientation, rather than operational.”
The example of Private Equity
CFOs can learn about this new active and strategic role from their already active and strategic counterparts in private equity the study found. Governance, people and organization, strategy and structure and operations are all areas that the CFO should involve in his work moving forward.
“Essentially we can define the CFO’s function into three main fields — as merger strategist, synergy manager and finance integrator. He should guide the strategic and transactional aspects of a merger, monitor and ensure synergy capture and manage the integration of the finance function itself,” stated Hasbani.
Consistently successful PE firms, the study found, generally pursue the following:
• More frequent and informal interaction with portfolio companies
• More active involvement in strategic as well as operational issues
• Higher degree of alignment of incentives between PE firm and portfolio companies (higher equity share to management)
• More reliable, timely and relevant information to the PE firm
As a result, the PE firm have a number of capabilities:
• More industry and investment experience among staff
• Fewer industries in focus
• Higher ratio of investment professionals to capital under management
CFOs must be business partners that actively manage value creation, influence strategy, governance and leadership inside any firm. Small changes in the Finance function will lead to greater success such as including an ambitious planning process, high speed in all development initiatives, releasing the full potential of the organization through alignment, engagement and incentives, and activating leadership. In addition, CFOs must be willing to sell when there is no longer a way to create incremental above-market returns.