John Maynard Keynes famously remarked that ‘when the capital development of a country becomes the byproduct of a casino, the job is likely to be ill-done’.
Of course, in the UAE and the region, capital market reforms such as privatizations and market making mechanism to increase liquidity have attracted both capital and companies, as the sector continues to witness a renaissance in the industry.
The restructuring of companies such as Drake & Scull, Union Properties and Shuaa have occurred in a transparent manner, infusing confidence among investors. Privately held businesses have followed suit, but as companies look for the most conducive place for raising capital, listing regulations come into play from an issuer’s standpoint.
From an investor’s standpoint, secondary market liquidity plays a critical factor and some of the more recent private sector offerings have thus far not attracted the follow up attention that was indicated in the primary market.
To be sure, not all IPOs fare well in any market, but it is equally true that ultimately this shows up in valuations. We have witnessed this in the UK capital markets as well, where the gap in valuations between UK companies (12x earnings) and their counterparts in the US (24x earnings) have widened to their highest levels in decades.
This is partly because companies in the UK have not been able to benefit from the eye popping returns delivered by the US tech giants. But it is also true that relative to their market cap, UK - and Middle Eastern stocks - remain under-owned by global fund managers that have chosen to overweight US equities. And in foreign markets have chosen to pick markets such as India.
Create more than one class of shares
Among a litany of further reforms to nurture a culture of stock market investing, perhaps one to consider for the domestic capital markets is to allow companies to issue more than one class of shares – i.e., ones with more voting power. (This has proven to be popular among US founder owners who have wanted to retain control.) And also have an alternate market designed for smaller firms that have lower capital requirements but cannot meet the existing listing criteria.
Such mechanisms will encourage further issuance. Moreover, it will allow for investors to feed into some of the newer ideas that have propped up in the real estate, venture capital, crypto and AI space.
Where the demand for capital is being met by smaller venture capital firms and/or the family and friends network. A greater numbers of listings will undoubtedly mean a greater number of failures as well, but the as the current IPO wave as already demonstrated, there is considerable pent up demand on behalf of investors to participate in growing sectors of the UAE economy.
It is further obvious that privatizations will attract the lion’s share of capital in the coming year, but this baton has to be passed on to the private sector. Particularly, the vibrant startup scene that is already apparent in the UAE.
Rather than ride the tail of the dragon scenario in the US capital markets that have, by most accounts, developed into a casino and are increasingly pulling in smaller investors through online trading platforms.
Stock sales without losing control
From a long-term investor’s standpoint of view, undervaluation serves as glad tidings - a perpetual season of joy as long as valuations remain low.
This gap in the current environment can be arbitraged away with increased issuance where owners feel they have greater degree of flexibility in the management of companies. (By having the ability to issue multiple classes of shares will allow owners to divest a greater percentage of their company without having to relinquish control).
With further privatizations, some of the increased interest will naturally follow. Consider the increased equity participation by international funds in more recent UAE listings, both in the primary and the secondary market.
As the UAE moves towards becoming an international hub - where capital markets can thrive even during weak economic performances - further reforms attracting all kinds of issuers will automatically increase the number of investors.
Thus creating a virtuous cycle that can compete - and beat - the likes of Silicon Valley.
