Small companies hunting capital

The Life: The company behind that little green-and-white car wash cart often seen at shopping mall parking lots around town has big ambitions. But GeoWash, which is a part of Q2 General Cleaning Services, faces regulatory hurdles before it can grow.

The owners of GeoWash are considering going public to raise funds and diversify from their car-wash business. Lauren Lancaster / The National

The company behind that little green-and-white car wash cart often seen at shopping mall parking lots around town has big ambitions.
GeoWash, which is a part of Q2 General Cleaning Services, was set up in Dubai in 2008. Over the past four years it has expanded to Abu Dhabi and Al Ain, and is contemplating an initial public offering.
"We want to diversify the business," said Abdulla Alshehi, the general manager of Q2, on why he wants to take the IPO route.
But before that can happen, the company must formally establish a board of directors. The current board is constituted only on a "friendly basis", Mr Alshehi said.
Lack of long-term funding is a constant itch for start-ups and small to medium enterprises (SMEs) in general.
While some SME owners complain about risk-averse investors in the Gulf, a few others lament the high interest rates on bank loans. But the high-risk status often associated with SMEs here is partly the result of a lack of effective corporate governance, which hinders a bank in assessing a business's credit quality, as well as the transient nature of the expatriate population.
Now, Dubai SME, an agency of the emirate's Department of Economic Development (DED), along with bourses such as the Dubai Financial Market (DFM) and Nasdaq Dubai, say IPOs could be an option for SMEs to secure extra funding.
Last year, Dubai SME announced that an equity market for SMEs had been approved in the emirate. But a timetable for introducing the secondary markethas yet to be finalised.
The advantages of an IPO include obtaining capital to expand and to generate greater brand awareness.
"Forward-looking SMEs are able to generate required funds for funding long-term capital expenditure, research and development and meeting other long term obligations [through IPOs]," said Prashant Kumar, the senior manager of research and advisory at Dun & Bradstreet, Middle East and North Africa. "Another key advantage . is in terms of generating public awareness about their businesses, generating required publicity and having a higher outreach to new customer[s]."
Officials from the DED say the infrastructure is ready for SMEs to seek the IPO route.
"The listing preparation processes of DFM and Nasdaq Dubai are SME-friendly, thus promising to make it smoother . for SMEs to list," said Abdul Baset Al Janahi, the chief executive of Dubai SME, in a statement.
But there are a number of hurdles for SMEs considering the IPO route.
If they seek to raise funds through the equity markets and issue shares on public stock exchanges, they need to take the first steps in the basics of corporate governance. These includeproducing annual financial reports and submitting them to regulators, as well as appointing independent directors and developing investor relations.
"Potentially, businesses could . be deterred from going public due to the . complexity of procedural and legal issues involved," Mr Kumar said.
Also, a number of businesses in the UAE are closely held family groups and, in general, are disinclined to disclose their financials.
IPOs are innately risky, as Facebook's troubled flotation last month shows, and analysts often advise small investors to stay away from IPOs undertaken by small and medium businesses.
The Middle East, however, has more than 400,000 high-net-worth individuals, each with liquid assets of more than US$5 million (Dh18.3m), according to a report last month from the state news agency Wam.
As investors, these high-net-worth individuals can be tapped to fund start-ups. Their high numbers might come as an encouragement to SMEs, although there is a "lack of attractive visible SME targets", Mr Kumar warned.
Still, for GeoWash, any costs for changing how the company operates or for altering its financial structure to comply with regulations will not be prohibitively expensive, Mr Alshehi said. "It will be part of our operating costs."
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