Will private sector enterprises provide UAE's next wave of IPOs?

The UAE capital markets are experiencing a surge in the number of IPOs ready to launch, alongside a noticeable increase in median valuations. However, there's been a pattern where the enthusiasm in the primary markets hasn't always been reflected in the secondary market performance, indicating a potential disconnect.

This issue is more pronounced in some private sector IPOs, even though the UAE's privatization initiatives haven't faced similar problems. Despite the growing role of market makers, issuers are exploring new strategies to maintain sufficient liquidity in the secondary market. This challenge isn't unique to the UAE; European markets have also encountered periods of low trading volumes, often resulting in more favorable valuations, as they struggle to match the extraordinary returns seen in the U.S. tech sector.

For long-term investors, these lower valuations present a valuable opportunity. From the perspective of issuers, the key challenge is achieving accurate price discovery, especially when primary market investors receive only a small portion of the shares they desire. This can lead to a discrepancy between primary and secondary market prices, further complicated by a lack of liquidity, which tends to highlight the most successful IPOs and makes investors wait for broader market adjustments or sector shifts.

To address these challenges, some have proposed using a Dutch auction system. In this method, securities are offered at a starting price that is gradually lowered until all the shares are sold. Essentially, the shares are sold at the second-highest bid price, which encourages investors to bid higher, knowing they'll pay the second-highest price. This method can make the process more inclusive, allowing smaller investors who are enthusiastic about the company to participate alongside larger institutions. As a result, price discovery could become more reflective of actual secondary market conditions.

The latter half of 2024 looks promising for UAE IPOs, with companies such as Etihad, Alec, Dubizzle, LuLu, AIQ, Amanat Education, and ADNH Catering all set to go public. This strong lineup is good news for both investment bankers and investors, who are increasingly focusing their capital on domestic companies. Even though some offerings have been described as 'boring' by the media, the underlying investment opportunities remain compelling.

Upcoming pension fund reforms aimed at increasing home country bias are likely to further expand the pool of listed companies in 2024-25. While institutional and individual investors may still prefer privatization programs, private sector companies could gain more traction as market conditions make their valuations and share allocations more attractive.

As the media shifts its focus more towards capital markets and away from the traditional emphasis on real estate, secondary market activity is likely to draw more investors. The UAE has made considerable progress over the last two years in boosting both domestic and international interest in its markets. As a hub for innovative ideas, the UAE’s capital markets provide a vibrant environment for efficient price discovery, making them an appealing destination for investors seeking a dynamic IPO ecosystem.