LONDON While Britain's stock exchange pulls out all the stops to woo Saudi Aramco, some leading British fund managers who would be among potential investors have expressed reservations about the oil titan's corporate governance and valuation.
The Saudi government values the state firm at $2 trillion (£1.55 trillion) and plans to sell a stake of around 5 percent next year in what is expected to be the largest stock market listing in history. Global financial centres from London to New York and Hong Kong are vying for a piece of the action.
Sources told Reuters last week that the London Stock Exchange (LSE) was working on a new type of listing structure that would be more attractive for Aramco by allowing it to avoid the most onerous corporate governance requirements of a primary listing, without being seen as second class.
But even should the LSE win an Aramco listing, active fund managers based in London who would be among potential buyers of shares said their participation was far from guaranteed, with many expressing concerns about the level of influence investors could command as well as corporate transparency.
Trevor Green, head of UK equities at Aviva Investors, the fund arm of British insurer Aviva (AV.L), cited "very big governance issues" around how much independently verified data about the company's oil reserves would be given, its board structure and the small portion of the company being listed.
"At this stage we would struggle (to take part)... governance is a key part of our process and this is going to break it in a lot of ways," Green said.
Clive Beagles, fund manager at JO Hambro, said he would likely look at the Aramco listing but doubted he would participate "because of those issues about being such a minority investor relative to people that you'd have very little influence over".
Saudi Aramco declined to comment for this story.
The oil giant has brought in investment banks, auditors, lawyers and management consultants as well as investor and public relations firms to help it restructure, go over its accounts and advise on changes it needs to make to its corporate governance to become a publicly listed company.
Governance is an increasingly important issue for asset managers as investors such as pension schemes and insurance companies are increasingly pushing them to hold companies to account more and prevent bad decision-making.
Companies looking to list on LSE with a "premium" listing need to float at least 25 percent of their equity. A "standard" listing allows a company to list under less-strict governance rules, although it is not then eligible for inclusion in the FTSE index and is considered a second-tier listing, something that would be less attractive to Aramco.
Given that, sources have told Reuters the exchange is working on a new type of listing structure to allow Aramco to float less than 25 percent without being classified as a standard listing.
British asset management industry body the Investment Association said while it wanted to see more high-quality companies brought to public markets, good governance and liquidity were "critical".
"IA members believe that 25 percent 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," said Galina Dimitrova, director of capital markets.
"Saudi Aramco is no exception."
Aramco is expected to list on the Riyadh exchange, the Tadawul, and at least one major international stock market.
It may not need to woo thousands of investors; it is expected to appeal to so-called strategic buyers such as other oil companies or countries looking to cement ties with Riyadh, such as China, which sources have previously said has pledged to back the IPO.
Buyers in London could include hedge funds and others with less onerous governance concerns, but even here there may be a serious divergence with Saudi over valuation.
Rohan Murphy, energy analyst at Allianz Global Investors, said while valuing the firm was an art and not a science, he considered the mooted figure of $2 trillion to be too high.
A survey of investors by investment bank EFG Hermes in March found most expected Aramco to be valued at between $1-$1.5 trillion. Thirty-six percent, however, thought it would come in below that.
Saudi Aramco declined to comment.
The company says it has reserves of 260 billion barrels, the world's second largest after Venezuela, but the figure has not changed for almost 30 years. Investors will be keenly awaiting as much detail as possible when Aramco releases studies by two large U.S. reserve auditing firms, expected later this year.
(Additional reporting by Dasha Afanasieva and Dmitry Zhdannikov in London, Reem Shamseddine in Riyadh; Editing by Pravin Char)