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Poor Prince al-Waleed Bin Talal. One of the world's wealthiest men has announced a billionaire's strike against Forbes magazine because it doesn't think he's as rich as he claims. In its annual ranking of global billionaires, Forbes valued the Saudi investor at $20-billion (U.S.). He says he's worth closer to $30-billion, and will "sever ties" with Forbes, accusing it of using a different methodology to count his wealth than other billionaires, and applying an anti-Middle Eastern bias.
Forbes is right and the royal is wrong – but this is more than an amusing side-show between a magazine and a narcissistic billionaire. It is a reminder that investors in emerging economies need to question the fortitude and effectiveness of regulators in those markets to ensure they're sound places to put their money.
Valuing the wealthy is a tricky business, more art than science. I can speak from experience – when I oversaw the creation of Canadian Business' Rich 100 list in 1999, we explained the practice was "more of an educated guessing game" – and was influenced by how Forbes compiled its data. Valuing public holdings was easy given the abundance of regulatory disclosures. Privately held companies and real estate were trickier: where the subject didn't provide financial data (and many did), we would estimate estimated cash flows, earnings, sales and other metrics based on conversations with industry experts, and apply standard industry multiples to value them. One or two list members provided data that seemed a bit inflated, so we discounted the figures in our calculations. One such individual complained that he should have ranked higher.
Of course, vigilance is important when rich list compilers face subjects who not only want to be on it – but to place highly. Such is the case with the prince, according to an exceptional piece in Forbes explaining its reasons for the lowball valuation. The key issue is the value of the prince's Kingdom Holding Co.. The prince loaded most of his holdings into Kingdom and then floated a five per cent stake on the Saudi stock market in 2007. But every year, the stock mysteriously shoots up in the weeks prior to Forbes' set valuation date. In the article, Forbes looked more closely at the company's underlying assets and expressed serious doubts about the values, based on the performance of underlying publicly traded assets – and the questionable valuation of private holdings. In addition, the Kingdom's former auditor Ernst & Young noted a discrepancy between the market and holding value of stocks in 2009 and 2010; in 2011, the Kingdom employed a different auditor, PricewaterhouseCoopers.
"In light of the Kingdom's opacity, small float and thin, questionable trading," Forbes said, it is instead individually valuing Kingdom's underlying assets, leading to its $20-billion valuation. This is more than changing the rules of an educated guessing game: Forbes raises serious, legitimate issues about an important public company on a regional stock exchange, implying the possibility of stock price manipulation, reporting deficiencies and lack of regulatory oversight. This should be a good wake-up call for the world's emerging economies: if you want to be taken seriously as a place to invest, your regulators need to live up to the standards of their developed economy peers – even if it means peeving a local prince.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Sean Silcoff