Challenging year ahead for IPOs

Dubai: The Gulf region had only eight initial public offerings (IPOs) last year compared to 14 in 2010 and the outlook is challenging for the year ahead, according to Deloitte & Touche (ME), a professional services firm.

Despite the grim outlook, Deloitte said there could be windows of opportunity for those firms that are well prepared to float their shares on the market.

"Given the scarcity of recent issuances, businesses that achieve readiness will attract greater investor interest, experience a shorter and more efficient IPO execution and approval process and, most importantly, the ability to list when they want rather than when they can," Deloitte said in a report yesterday.

Muted activity

While the bond and sukuk issuance from the region has picked up since the middle of last year, all other financial market activities such as mergers and acquisitions, private equity fund raising and IPOs have slowed down.

Although the region's equity markets have been facing a long drought of IPOs, analysts said the region has witnessed some important changes in the regulatory environment, with some of the regulators such as the Saudi Capital Market Authority, Dubai Financial Services Authority and the Qatar Financial Markets Authority revising the listing rules to raise the minimum requirement around corporate governance, business systems and processes, and financial discipline.

"Based on interaction and discussion with the regional regulators, the main themes coming out are around greater transparency, a stringent requirement that IPO candidates have robust financial systems and environment, and for the business to have world class corporate governance once listed," Declan Hayes, managing director, Transaction Services at Deloitte in the Middle East, said.

Regulatory changes

The new regulatory changes have sent a clear message to corporates aspiring to tap capital markets to adhere to more stringent regulations. The improved regulatory environment is helping companies to be better prepared for listed entities. "Regionally, we are monitoring a pipeline of corporates that are aspiring to access the equity capital market in the GCC and indeed internationally, ranging from business at an early pre-IPO stage to issuers who are undergoing an approval process with the respective listing authorities," Adnan Fazli, director in the Capital Market Transaction Services team at Deloitte Middle East, said.

Based on recent regional listings it takes, on average, 18 months from conception to actual listing, with the unprepared facing further delays. The early stage prospective issuers need to assess their suitability to list, both in respect of external considerations such as their investor appeal and appropriateness of listing exchange and capability of management, and the internal systems to deal with the rigours of the listing and post-listing environment.

What holds back firms?

Despite the challenges faced by prospective GCC issuers, Deloitte said its transaction services line is witnessing increased demand to keep their companies IPO ready.

Investment bankers, stock exchanges and private equity firms say there are a number of companies waiting to tap the public markets but the adverse market conditions and the huge valuation gap that exists in the market are preventing many companies from entering the fray.