The UK’s top financial regulator yesterday sought to pave the way for Saudi Arabia’s state oil company to make its share-sale debut in London.
The Financial Conduct Authority proposed new more lax rules that would accommodate a listing on the London Stock Exchange (LSE) of Saudi Aramco’s initial public offering of shares, which may come as early as next year. Aramco plans to list p to 5 per cent of its shares on Saudi Arabia’s domestic stock exchange, the Tadawul, and on at least one major foreign exchange.
The LSE has been courting the Saudi leadership to be the exchange of choice, getting support from the UK prime minister Theresa May and her government.
The FCA, the umbrella organisation overseeing the UK Listing Authority, which is the direct regulator of LSE, first floated the idea of a new type of listing in February and its officials have been sifting through responses from various interested parties over the past few months.
The FCA's decision to propose the new rules comes even as a number of bodies representing the largest investment institutions in Britain have publicly voiced their opposition to relaxing investor protection rules to accommodate sovereign share-sellers such as Saudi Arabia.
“Regulatory protections for investors lie at the core of the listing regime,” Andrew Bailey, the FCA chief executive, said when announcing the new proposal. “However, it is important that these protections remain well-targeted [and] refining the listing regime in this way would make UK markets more accessible while ensuring that the protections afforded by our premium listing regime are focused and proportionate.”
The main proposed rule change is that the sovereign controlling shareholder would not be considered a related party, which means its interaction with the company will not require approval of other shareholders.
Mr Bailey continued: “Sovereign owners are different from private sector individuals or companies – both in their motivations and in their nature. Investors have long recognised this and capital markets are well adapted to assess the treatment of other investors by sovereign countries.”
Under existing rules, a “premium” listing requires a minimum 25 per cent float and must abide by UK governance standards built up over decades, while a “standard” listing requires less stringent but still onerous European Union standards.
Even with the FCA’s proposed change, Aramco would have a long way to go to meet the governance standard required, including producing at least three previous years of audited accounts. The state oil company recently produced its annual review which contained no financial information of any kind.
Among those opposed to the rule changes is the Investment Association (IA), one of the UK’s largest investor lobbying bodies, representing 200 asset management firms, with combined assets of £5.7 trillion (Dh26.6tn).
Galina Dimitrova, the IA’s director of capital markets, has said its members “believe that 25 per cent should be the minimum free float level for any premium listed company in the UK, and that this should be preserved in all cases to protect the integrity and standard of the UK premium market – Saudi Aramco is no exception”.
Others who have voiced concern include Saker Nusseibeh, the head of Hermes Investment Management.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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