The 2023 UAE IPO season kicked off in style with three listings straight out of the blocks before the end of Q1. What’s interesting is that each one was structurally different: two government-backed issuers - ADNOC Gas and Presight AI - on ADX and one private issuer (Al Ansari) on DFM.
Such diversity can only be good news for investors as there are different types of assets available for investors to diversify their portfolios.
The key feature of the IPOs so far this year has been the strength of demand, especially from international institutional investors. ADNOC Gas, for example, drew in $124 billion, the strongest ever demand for a secondary offering in the MENA region (50 times oversubscribed in aggregate).
International investor demand exceeded $25 billion, which is 10 times the total offering size. With an offering size of $2.5 billion and an equity value of $50 billion at listing, ADNOC Gas is the largest-ever IPO in Abu Dhabi - and the largest IPO globally to date this year. It remains to be seen whether it will still be the largest global IPO at the end of the year, but do not bet against it.
The continued success of IPOs in the UAE cements the country’s position as a go-to destination for global capital and reinforces confidence in the local securities exchanges. The UAE markets are certainly continuing to look attractive as volatility remains in other developed markets.
The quality of the issuers and the promise of healthy dividends (in most cases) are also significant factors in keeping the world’s investor focus in the Gulf region, particularly the UAE and Saudi.
Laying out options for private entities
The two key questions from market observers at the end of the 2022 season centred around whether or not there would be a strong number of issuers in 2023 and, if yes, would there be a greater proportion of private issuers. The first question has been answered but it remains to be seen if we will see more private issuers.
Non-government issuers deepen the capital markets, provide greater liquidity and options to investors and encourage other private companies to use the equity capital markets as a source of funding. We are certainly seeing an uptick in potential issuers seeking advice on pre-IPO structuring and preparation.
The principle issues that need to be considered are the IPO perimeter (what assets will actually be a part of the IPO, which is more relevant for larger conglomerates or family businesses), the board of directors and senior management and corporate governance and the financial history.
There are many potential issuers out there, but the fundamental questions are whether equity capital is the right option in terms of financing and is the company ready and suitable to be listed. The DFM and ADX are encouraging family businesses to list, and IPO readiness will be key, together with realistic views on valuation. (How public investors value a family business may be quite different from the family itself).
The other potential issuer cohort that needs to be encouraged are SMEs.
IPO comes with obligations
An IPO may not be always be the right option for private companies looking to raise funds. Suitability to list is a very important factor and also whether the company’s equity story would be attractive to potential investors.
Primary consideration should be given as to whether or not the company will, or will prior to listing, comply with all of the legal and regulatory requirements for an offering in the UAE and listing on one of the UAE’s exchanges.
Another important assessment for the boards of potential IPO candidates is the cost of raising finance through the capital markets and whether it is a good return on investment. The return on the initial capital expenditure for listing (advisory fees, regulatory fees, etc.) needs to be viewed through a long-term prism.
It should also be noted that one of the intangible costs of an IPO is the stress on management time where continuing to run the business must be considered whilst also conducting the IPO. A seemingly minor, but vitally important, factor for IPO success is that the board of directors and shareholders should be aligned in pursuing the IPO and understand the implications of a much wider stakeholder base, enhanced corporate governance and post-IPO obligations, including immediate disclosure of material price sensitive information.
Will other Gulf governments join in?
There are certainly likely to be more government-backed issuers, with Dubai in particular announcing 10 government entities to be listed, of which four have already taken place - DEWA, Tecom, Empower and Salik.
There is also the creation of the Abu Dhabi IPO Fund with $50 billion to assist potential new issuers. The Fund also assists potential issuers with strategic development and liaison with government entities.
It remains to be seen whether or not other GCC governments will follow suit with their own privatization programmes. One thing is for sure is that there needs to be more private issuers to make the UAE capital markets sustainable for the longer term as there are only so many government assets that can be brought to market.