As the number of IPOs in waiting continue to bulge the UAE capital markets, even as median valuations have risen, there have been instances where the phenomenal subscriptions in the primary markets have not been followed up with secondary market performance.
This indicates something of a disconnect.
This has not been true for the privatization program, but has risen to the surface for some of the private sector IPOs. Even as market makers have come to play a more active role, issuers have looked to other avenues for ensuring secondary market liquidity.
This has been true in European markets as well, which have grappled with bouts of thin volumes, often manifesting in the form of cheaper valuations. This was mostly because none have been able to keep up with the eye-popping returns delivered by US tech giants.
Price disconnect between primary and secondary
For longer term investors, cheaper valuations are a gift they will readily accept every day of the week. From an issuer’s perspective, price discovery in an environment where primary market subscribers are allotted only a sliver of what they desire, there arises a mechanism where the disconnect between primary and secondary market activity opens up.
A subsequent lack of liquidity further enforces the zeitgeist of only chasing the winners and forces the loyal shareholder base to wait for sector rotation plays and the general market to catch up.
To counteract this, some have been exploring the idea of a Dutch auction (named after the way flower merchants in the Netherlands sold their goods).
This involves selling securities at one price, and then moving it lower. Practically, this means that the shares being sold are done so at the second highest bid. The idea being that if investors knew that they would be paying the second highest bid, it would encourage them to bid a higher price.
This way, the process opens up not only to big institutions and large brokers, but also smaller investors who have an affinity for the company. Price discovery then becomes more reflective of what the real secondary market is likely to reflect.
Busy H2-24 for UAE IPOs
In the UAE, with IPOs from Etihad, Alec, Dubizzle, LuLu, AIQ, Amanat Education and ADNH Catering lining up for a second half listing, the pipeline remains strong for investment bankers as well as investors to continue to allocate their capital towards domestic companies (even though the media has taken to describe some offerings as ‘boring’.).
Along with pension fund reforms that will likely introduce and reinforce home country bias, the stage is set for the stable of listed companies to increase dramatically in 2024-25.
Even though the preference for institutional as well as individual investors will remain biased towards the privatization program, private sector companies will likely win some favor in these competitive markets as valuations (and allocations) become more attractive.
This feedback loop will become further self-fulfilling as the media starts to focus on the capital markets, rather than the latest real estate offering, which has clearly been embedded into the culture of the country.
There is no better magnet than vibrant secondary markets to attract investors. The UAE has taken gargantuan leaps in the last two years to dramatically increase domestic as well as international interest.
The UAE remains a marketplace of ideas, however, and it is these that are best reflected in the capital markets.
For a vibrant IPO ecosystem, nothing beats the location of a marketplace where price discovery is at its most efficient. That is where investors actually want to be.
