Equity capital markets (ECMs) have consistently been a popular way of raising funds in the United Arab Emirates, in particular via initial public offerings (IPOs).
Last year witnessed a revival of IPOs after more than five years of complete silence, with four IPOs successfully launched on the Dubai Financial Market (DFM). In addition, Gulf Marine Services Company, a UAE-based company with operations around the world, was listed on the London Stock Exchange.
Access to ECM
Generally speaking, there are a number of options available for companies to access the ECM in the UAE. The most recognizable options are:
- Establishing a private joint stock company and listing its shares on the DFM or the Abu Dhabi Stock Exchange (ADX), after the Securities and Commodities Authority (SCA) implemented Regulation No. 10 (2014), which allows private joint stock companies to list on one of the UAE’s stock markets. Equally, existing private joint stock companies may also list their shares subsequent to the same decree;
- Converting limited liability and private joint stock companies into public joint stock companies and offering their shares to public;
- Establishing a greenfield public joint stock company by executing an IPO process (SCA is now more reluctant to approve this option); and
- Dual listing of companies which are already listed on foreign or free zone stock exchanges.
From start to stop, an IPO is a legal-driven process. Lawyers work very closely with the company to perform the required corporate restructuring to satisfy the applicable legal requirements. Additionally, they develop a dialogue with the company’s auditor to ensure that the company satisfies the financial performance required by the UAE regulators.
Readiness is the most important part of executing an IPO. Much work needs to be done to get private companies and family businesses acquainted with the level of disclosure that they need to comply with once they become shareholders in a public company, continuing obligations, corporate governance, board structures, the appointment of independent board members, etc.
On the other hand, substantial work needs to be done at the corporate restructuring level to put everything in order and ensure that subsidiaries with unrelated activities, or those which might have a negative impact on the financial performance of the company, are spun off the company’s group.
The challenge which always faces newly listed companies, however, is to make executive board members cognisant of the fact that there are independent and non-executive board members who need to be involved in the decision-making process. In particular, newly listed companies need to get acquainted with corporate governance rules and familiarize the management team with the continuing obligations of public companies.
Despite the challenges above, companies benefit from the advantages of using ECMs for funding. Getting new equity investors is a great method for companies to get financing without resorting to debt. It is also an interest-free financing method. Many investors tend to not be very keen in investing in closed companies and favour liquid investments where they can achieve a quick exit, if necessary.
IPOs will as a whole provide companies with access to wider capital while also enhancing their shareholders’ liquidity and raising their corporate image. It is easier for public entities to raise capital, their access to capital lacks interest and debt repayment, and they have financing flexibility through long-term loans, equity raising and debt instruments.
The shareholders in turn may access the market to sell their own shares. There is also a broader customer and investor awareness for the company, along with a heightened enhanced credibility leading to a greater consumer and supplier confidence.
In general, the ECM in the UAE will develop in time. The UAE will see more local and regional companies going public in the medium term while the quality of foreign investments will also add more stability to local markets due to inclusion in the MSCI Emerging Markets Index.
Business in the UAE is extremely positive. Dubai in particular is a major beneficiary of the difficulties elsewhere in the Middle East and North Africa region, and it has reinforced its position as the leading regional financial centre. This results from its superior lifestyle and infrastructure coupled with its unparalleled regional and global air connections.
The DFM and ADX have both experienced drops in recent months driven primary by concerns of falling oil and gas prices. However, most of the companies which have been affected, e.g. the recently listed Amanat Holdings and Dubai Parks and Resorts, are not involved in the oil and gas field. Further, those industries do not comprise a major part of Dubai’s diverse economic base. Regardless, falling natural resources prices have spurred a sell-off, and investors are incentivised to buy existing shares rather than participating in new IPOs.
The downturn may have resulted in companies delaying IPOs initially envisaged for 2015, but one can assume that there will be a handful. Once it becomes clear that Saudi Arabia, the UAE, and other energy-producing countries have considerable reserves this should improve – provided they show willingness to continue existing levels of public expenditure for a prolonged period.
While 2015 will not be as busy as 2014, industries such as healthcare and education are expected to experience considerable growth in the Gulf Cooperation Council states, and many expect to see IPOs emerging from these sectors.
Ahmed Ibrahim is a partner and head of equity capital markets at Al Tamimi & Company
Dubai International Financial Centre
6th Floor, Building 4 East
Sheikh Zayed Road, PO Box 9275
Tel: +971 (0)4 364 1641
Fax: +971 (0)4 364 1777
E-mail: [email protected]