Investors today are not just taking a growing interest in the environmental, social, and governance (ESG) performance of the companies they invest in. Companies who invest in proper Investor Relations (IR), not just Public Relations (PR), stand to increase their chances at successful listings, and valuations at or beyond IPO.
Iridium Advisors is a consultancy that helps publicly listed enterprises in the region grow shareholder value and trust by building and running transformational investor relations programs.
Economy Middle East interviewed their CEO, Oliver Schutzmann, who recently spoke at the inaugural Dubai edition of the IPO Summit.
We asked:
1- Please expand on your talk: Building and Fostering IR: “A strategic enabler on the road to listing” – What key IR arguments did you present?
In my keynote address, I highlighted the importance of preparing for a long-term relationship between a company and its shareholders, not just completing the IPO itself. I used the analogy of a wedding and marriage to emphasize that an IPO is just the start of a commitment to creating value for shareholders, similar to a commitment to creating a lifetime of happiness in a marriage.
I also emphasized that a successful IPO requires a significant level of investor relations readiness, as it serves as the strategic enabler for communication and engagement between the company and its shareholders, helping to build and maintain trust over time. Good investor relations help a company communicate its vision, strategy, and performance to its shareholders, providing them with the meaningful information they need to make informed investment decisions.
Read: MENA IPO Summit kicked off today in Dubai
To achieve effective IR, I presented three key arguments for GCC businesses to focus on:
- Build trust by understanding the difference between PR and IR. One of the most common issues that we find in GCC capital markets is that companies don’t distinguish between PR and IR. They focus a lot on PR, especially during the IPO process. But PR initiatives are mainly designed to generate news coverage which attracts short-term interest, while IR initiatives are designed to build trusted relationships and attract long-term investment.
- Comply with globally accepted IR standards – For the past 100 years or so, the investment process has remained largely unchanged. The market has certain requirements and companies must fulfill these requirements. A company that goes public needs to be ready from day one to meet these requirements. It also needs to be prepared to upgrade its IR capabilities over time.
- Follow a structured IR upgrade path to unlock a premium valuation. Companies need to know how the market looks at them, especially the information and management access they provide as part of their IR activities. To help companies understand where they are on the IR maturity curve, I talked about Iridium’s classification into five IR archetypes: IR-Agnostic, IR-Basic, IR-Emerging, IR-Advanced and IR-Developed. Most companies are IR-agnostic after their IPO because they only fulfill minimum regulatory requirements but don’t engage with the investment community, which can lead to a valuation discount, while an upgrade to IR-emerging — the expected IR maturity level in emerging markets — could add a significant valuation premium.
Companies that prioritize communication, transparency, and trust will be best positioned for long-term success.
2- What do your transformational IR programs include? Is there a way to quantify ROI for these enterprises under these programs?
Many companies in the region feel that they are undervalued and misunderstood. They believe that the business value they create will automatically convert into tangible returns for their shareholders. And, in theory, this conversion gap should be bridged through a professional IR function. After all, the main goal of IR is to ensure that a) the market understands the value the business is creating, and b) the company board and management understand how the market views and values their business.
However, it takes a lot of first-hand experience at the senior management level, and equivalent exposure to the global institutional investment community, to develop and execute an IR function that can achieve those goals. This is where a specialized management consulting firm like Iridium can add a lot of value. Typically, the companies we work with use our proprietary consulting frameworks to diagnose their IR maturity and then ask us to help them design, build and operate high-performing IR programs.
For example, we’ll conduct a baseline assessment of a company’s IR capabilities and analyze hundreds of data points of their financial performance, strategic roadmap, and valuation drivers compared to industry peers. We then synthesize this information to provide data-driven recommendations to the board and management to decide on the company’s IR strategy and implementation roadmap.
Once the board agrees on a roadmap, we’ll start by designing the IR organization, building the necessary IR skills, creating high-grade informational materials, and assisting the company in managing all aspects of running a rewarding IR function. This usually involves actively engaging with regional and international analysts and investors, managing quarterly earnings cycles, and participating in capital markets events. Additionally, it entails gathering market feedback to help the company understand how the market perceives its performance.
You see, when it comes to developing an IR program, it’s crucial to recognize that the principles of investing have remained largely unchanged for more than a century. Investors and analysts still want to thoroughly assess companies and require ‘meaningful’ information to do so. They also want to speak to senior management to confirm or discredit their investment thesis.
To effectively evaluate a company, analysts and investors must have access to meaningful information about its performance, strategies, and opportunities. This is not just about presenting raw financial data but also about communicating a compelling vision and strategy that inspires confidence and excitement.
Simply providing year-on-year or quarter-on-quarter comparisons is not enough to inspire investment. Management must also demonstrate how the company has achieved these results and outline a clear view of growth potential that will enable it to capitalize on future opportunities.
Investors will also want to see that your company has a competitive advantage and that your value drivers are strong. Most importantly, organizations and leaders must be able to convincingly link their strategic, financial, and operational achievements to future growth potential.
Once this information and narrative have been developed, it is necessary to consistently convey and repeat it through all available investor relations channels, including earnings calls, earnings presentations, and interactions with investors, analysts, and the media.
When it comes to measuring the ROI on investor relations, I’m really proud to say that Iridium developed the world’s first machine learning algorithms that decode the value of investor relations. In its current phase of development, our Iridium Quant Lens AI platform focuses on banks. And we use more than 10 million data points across 750 global banks, including 70 regional banks, to quantify the contribution of IR to valuation with up to 95% accuracy.
Specifically, for GCC banks, we’ve found that upgrading the IR quality from IR-Agnostic to IR-Basic positively impacts valuation by 10.4%, and upgrading from IR-Basic to IR-Emerging adds another 14.6%. In total, a full upgrade from IR-Agnostic to IR-Emerging can unlock 25% of valuation potential.
3- By selling 49% of OQ shares, Oman just announced jumping on the IPO bandwagon that Saudi and the UAE launched in 2022 with both markets selling assets in subsidiaries. How do you see the GCC market progressing on both the legislative and investor appetite ends? What are your expectations for 2023/2024 in terms of IPO listing values?
IPO markets tend to boom when you witness record index performance, and that is exactly what happened in 2022. While international equity markets were impacted severely by interest rates, inflation, and recessionary fears, the GCC markets were largely unaffected by these trends, thanks to strong fundamentals and high energy commodity prices. This caught the attention of the international investor community, offering opportunities they could not find elsewhere, while aligning with their need to reposition away from Russia, which has been excluded from emerging market investments.
These factors, along with the denationalization of prized public sector entities such as DEWA, Salik, and Tecom, made the UAE more attractive to investors, and we can expect this momentum to continue through 2023 as the focus on greater transparency, the adoption of ESG reporting, and the maturity of Investor Relations practices continue to advance.
Outside of Saudi and the UAE, primary market activity was muted. We saw two placements in Morocco and Oman with average tickets not exceeding $20 million. Macro Group Pharmaceuticals debuted in Egypt with an offer size of $82.7 million. Interestingly, all three companies are trading below the offer price, while shares of Macro Group Pharmaceuticals have halved. This highlights just how challenging it is to maintain valuations once the market interest around the IPO subsides and makes a compelling case for organizations to prioritize their Investor Relations functions not only in the lead-up to going public but as an ongoing, long-term business imperative.
While the wave of high-profile IPOs in Saudi Arabia and the UAE is expected to continue through 2023, as you rightly pointed out, one other market that could also see such activity is Oman, where the country’s Investment Authority (OIA) could potentially list several of its assets in a bid to drive investment and strengthen its capital markets.
4- What are the risks involved with stock launches this year, considering potential economic downturns in the US and Europe, inflation, security issues, supply chain disruptions, and the like?
As is the situation today, it is challenging to expect three consecutive years of historical records in the Gulf IPO market. Moreover, hydrocarbon prices may experience additional volatility driven by a global macro slowdown. Yet, the region’s integration into the emerging markets universe will continue. Today, four out of six GCC countries are already classified as ’emerging’ and now account for 7.9% of the MSCI Emerging Markets Index compared to less than 2% just seven years ago. Passive funds dominate, while active funds are still massively underweight.
All this fosters a favorable environment for the Gulf IPO market in 2023. Yet, IPO candidates are advised to be more flexible on valuations and the timing of placement, and companies will need to show, not just tell, how they are delivering on their aftermarket investor relations commitments. Other factors which should be considered are potential volatility in commodity markets, global trends in interest rates, inflation, recession, and geopolitical risks. As long as regional markets can show signs of strength, the prospects for the debut of high-quality issuers with a solid track record and stable business model will continue to be positive.
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