As a new wave of private company listings begins to gain momentum on the DFM, a price stabilisation mechanism common in Europe and North America could help catalyse the next phase of growth of the UAE’s capital markets, while providing added reassurance for issuers and investors.
Since the launch of the DFM in 2000, it has grown to be one of the primary stock markets in the region, home to more than 60 listed companies. In 2022, a wave of capital growth began with a regular stream of IPOs of public sector assets. More recently, however, particularly in an environment where higher interest rates have become the new norm, there has been a surge in interest from the private sector, as businesses in the UAE increasingly turn to equity capital markets to fund their growth strategies.
Underpinning two of the most successful recent IPOs on DFM is a price stabilisation mechanism called ‘reverse greenshoe’. xCube pioneered the first use of the reverse greenshoe in Dubai earlier this year in the listing of parking services provider Parkin and it was later used in the IPO of grocery store operator Spinneys.
The reverse greenshoe is a tried and trusted mechanism for safeguarding against the stock price of a newly-listed company from falling below its IPO price. In doing so, it provides peace of mind for issuers, reassures investors and contributes to a dynamic, positive capital market.
A reverse greenshoe – named after the Green Shoe Manufacturing Company that pioneered the concept of a stabilization mechanism in the US a century ago – is structured as a put option that gives the stabilization manager the right to sell shares back to the issuer at the IPO price if the stock price falls below the listing price.
The option can be actioned within 30 days of the offering. If the company’s stock falls below its IPO price within the first 30 days of listing, the stabilisation manager buys shares in the open market at or below the IPO price and sells them back to the issuer at the IPO price.
The standard minimum number of shares that should be included is 10%, but the widely accepted international model is usually set at 15% of the size of the offering.
Based on recognised international implementation standards and approved by regulators in developed markets, the reverse greenshoe provides a protection mechanism for private companies looking to raise capital through an IPO that may not have much experience in capital markets, an advantage that is particularly relevant for younger financial centres like the DFM and ADX.
In the UAE, the price stabilisation mechanism is outlined in IPO prospectus. This transparency has helped boost IPO subscriptions by giving investors increased confidence. In the last two IPOs that included price stabilisation mechanisms on the DFM, we saw a boost in subscriptions in both the total oversubscription amount as well as the number of individual subscriptions.
Price stability at crucial point
The primary benefit of the reverse greenshoe is its ability to stabilise the share price if it falls below the IPO price. This helps prevent a sharp decline in stock value immediately after the IPO, which could damage investor confidence and lead to negative publicity for the listing company. By providing a mechanism to support the stock price, it may also encourage more investors to participate in the IPO and hold onto their shares.
For issuers, the reverse greenshoe provides confidence that their IPO will not be a flop, which could damage their brand. It offers clarity and certainty that all the hard work of their listing will deliver the targeted outcomes. It can also strengthen the position and reputation of the capital market itself, by helping to build confidence and assurance among other potential issuers that the market is a suitable host for their listing.
For investors, the reverse greenshoe is a transparent mechanism to protect the value of their investment and prevent price instability in the crucial first few weeks post-IPO. Most international investors will already be familiar with the reverse greenshoe from their activities in other markets. Seeing it being used in the UAE will provide further evidence that local markets are fast-growing markets that are up-to-speed with international best practices that merits their attention.
