Ever since Apple went public in 1980, the market for primary offerings has remained largely unchanged.
A pattern emerged that the largest and most disruptive of companies were going to become part of the larger economy and by doing so, were going to attract a swath of investors. This implied that the retail investor was going to be crucial, even as institutional investors created their own vehicles - mutual funds, hedge funds, pension funds, etc. - to attract the widest number of investors possible.
Reaching for minimum post-IPO allocation
The UAE has been no different in adopting this pattern, but curiously, the largest swath of investors has been attracted by companies that would have been considered the least ‘disruptive’, at least in the traditional sense. Companies like Salik, Dubai Taxi, Empower, DEWA, ADNOC Gas and now Parkin have attracted large numbers of retail investors, who know fully well that they are not going to be allocated more than the minimum guaranteed by the issuer.
Why then has this pattern continued and what does this herald for the next few issuances?
- It is apparent that retail investors are keen (even desperate) to increase their allocation to those parts of the economy that are tied in to not just the population growth (as targeted by the ambitious Urban Plan 2040), but also derive ancillary benefits that these accrue.
- Large primary subscriptions have now spilled over into the secondary market trading, where a newer and younger demographic has taken to building their portfolio in response to the infinitesimal allocations they receive from the primary market.
- Valuations remain at the core of the decision-making process, and the market seems to be evolving from the pure play dividend approach to looking at growth prospects and price/earnings multiples. (Parkin has been offered at a multiple of 16, or nearly a 30 per cent discount to its peers in the US. That discount factor becomes even larger when ratios such as price earnings to growth (PEG) ratios are taken into account.)UAE’s
As the capital markets continue to evolve, it is entirely likely that to increase allocations, companies move towards alternate means for attracting investors. These include the infamous ‘Dutch auction’ process, whereby bids are collected starting at the highest price and then progressively moving lower.
At the end of this ‘direct listing process’, everyone is offered the shares at the lower price. Whilst this sounds counterintuitive for issuers, it removes the need for expensive investment banking and underwriting fees, and is particularly attractive for the private sector as the offering sizes become smaller (which is likely to be the case for the majority of UAE offerings in 2024).
Successful examples of such an approach include Google, Spotify and Doordash amongst others. It is entirely likely that issuers will experiment with this approach to further broaden the base of retail and institutional investors whilst keeping issuance investment banking costs low.
Certainty in profitability – and valuation
For now though, Parkin has amply demonstrated the ever increasing appetite of the retail investor, looking for certainty in profitability, valuations and clarity of the business model. Whilst 63,000 investors may still be a small number by international standards, it is worth noting that these are direct investors (not going through any collective investment scheme). Accounting for that, the number becomes respectable even by international standards.
These will further act as a catalyst for new issuers. But as the level of new issuance moves into the private sector domain, it is equally likely that the stance of investors will become more selective, prompting issuers to try novel approaches to attract newer categories of domestic, regional and international investors.
For the most part, the advice for both issuers and investors remains simple: keep the eyes firmly on valuations to achieve the maximum amount of success (as defined by not only funds raised but subsequent performance, as exemplified by Salik, Empower, DTC, Taaleem, etc).
In a crowded market for primary issuance, issuers will need to get more creative if they are to remove the sentiment of rising valuations and ever smaller allocations. Parkin demonstrated that these are not constraints.
It will not be true every single time, and the growing body of investors are already suggesting different approaches (other than leverage) as they seek access. The status quo is about to change.
