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Evaluating companies in opaque business environments like the Middle East and North Africa poses unique challenges. In a region where the majority of mid-market firms lack audited financials and family conglomerates dominate, relying on financial indicators alone may not provide a comprehensive assessment.
Hence instead of relying solely on traditional metrics, innovative lenders are focusing on operational data, governance structures and third-party intelligence to assess creditworthiness. A good example is Butec Utility Services, a Lebanese infrastructure firm that secured a $20 million EBRD loan based on governance reforms and operational benchmarks, rather than the traditional five years of audited statements.
Let’s dive into:
- What Company Assessment Entails
- The Challenges of Assessing Companies without Financials
- Key strategies and Best practices for Non-Financial Assessments
What Company Assessment Entails
Company assessment is the process of evaluating various business aspects to determine a company’s overall health, performance, and potential risks. This informs decisions on investments, export or trade financing, lending, and strategy. It entails analysing both quantitative data like financials and qualitative data like management’s expertise, strategic vision, and governance practices to gain a comprehensive understanding of the organisation's present condition and future potential. Key areas of assessment include financial health, market position, management, operations, affiliations to other entities, risks, and growth potential, with comparisons to industry.
The Challenges of Assessing Companies Without Financials
Assessing companies in MENA and GCC regions can be complex due to:
Many GCC countries have adopted international financial reporting standards. However, implementation and compliance differ significantly across the region, and many companies still do not provide comprehensive financial statements. This further complicates financial analysis and comparisons.
Influence of evolving government policies and regulations on business operations
The GCC’s rapid regulatory reforms like the introduction of open banking frameworks and economic diversification policies presented new opportunities but also brought in uncertainties. As a result, companies must continuously adapt. This incurs additional costs and leads to operational disruptions.
Geopolitical and macroeconomic stability
The region’s ongoing conflicts and escalations create volatility and uncertainty. This can rapidly change a company’s risk profile. Policy uncertainty stemming from evolving government regulations and macroeconomic factions like oil fluctuations further exacerbate this volatility give their impact on the regional economy.
Cultural and operational complexity
Since most companies in the GCC are family-owned and prioritise personal relationships over formal financials, decisions are often based on connections rather than objective measures. The concentrated ownership structures further complicate the matter raising questions over corporate governance.
Key Strategies and Best Practices for Non-Financial Assessment
With the right approach, financiers, investors and lenders can still make informed decisions and manage risks effectively.
Below are a few key strategies for company assessment.
When financial statements are unavailable, prioritise evaluating qualitative factors such as the age of the business, management team's experience, market position, competitive ecosystem, regulatory environment, industry growth prospects, currency, and geopolitical risks.
Alternative Data Sources
Supplement your analysis by leveraging alternative data sources. These may include industry reports specific to the MENA and GCC markets, local legal announcements, payment data, bankruptcy and court records, suppliers, customer feedback, and social media engagement.
Regional Benchmarking and Risk Assessment
Gain further insights through regional benchmarking. Identify similar companies within the region, research their performance, and apply relevant multiples to estimate the target company's size, performance, and value. For effective risk assessment, focus on regulatory compliance, business model resilience (especially to geopolitical risks and oil price fluctuations in GCC countries), and track region-specific key performance indicators.
Implementing Best Practices
As such, it is critical to:
- Create an evaluation system customised for the MENA and GCC regions.
Understand the region’s specific cultural context, its local laws, and the business practices that influence company decision-making processes. Align your evaluation metrics to reflect the specific market conditions of the region. - Conduct comprehensive due diligence investigations that involve seeking advice from local experts to identify potential risks that may not be obvious through standard evaluation methods.
- Utilise real-time monitoring tools to continuously assess regional vulnerabilities.
Use tools that track market conditions and provide updates on regulatory changes and competitive activities. Monitor for potential economical, political, or social factors that could affect business operations. Last, make use of data analytics platforms that gather data from multiple sources. - Conduct in-depth interviews with company executives and essential decision-makers to gather valuable qualitative insights. Focus on engaging key decision-makers to understand their vision, strategies, and operational challenges.
- Seek insights from experts in the industry for more perspectives on the matter.
Actively engage with industry experts like consultants and analysts to gain insights into market trends and strategic advice tailored to specific industries and markets.
Cedar Rose: Your Partner in Mastering Risk Assessment Even Without Financials
At Cedar Rose we are dedicated to helping you overcome the complexities of emerging markets.
With over 25 years of experience under our belt, we provide a comprehensive suite of supply chain risk management and data-driven solutions to enhance your risk management in the MENA region and beyond. Our services consist of tailor-made risk evaluation frameworks, access to comprehensive and reliable corporate data and credit reports, as well as professional guidance on regional commercial strategies.
Contact us or sign up to our all-in-one global risk management platform, CRiS Intelligence to discover how we can guide you through the challenges and opportunities these markets present.
Sources
- https://www.emerald.com/insight/content/doi/10.1108/ijaim-09-2023-0244/full/html?skipTracking=true
- https://www.mckinsey.com/industries/financial-services/our-insights/the-state-of-gcc-banking-an-exceptional-operating-environment
- https://mco.mycomplianceoffice.com/blog/uae-saudi-arabia-code-of-conduct-compliance
- https://www.spglobal.com/ratings/en/research/articles/241010-creditweek-what-are-the-credit-risks-of-the-escalating-and-expanding-middle-east-conflict-13282702
- https://capitalgate-advisors.com/navigating-the-gccs-regional-dynamics-for-long-term-success/
