Gulf IPOs: When is it a bad idea to go public?

But as companies in the region increasingly tap public markets, industry experts caution that going public isn’t always the right strategic move.

In the first quarter of 2024 alone, there were 10 IPOs across the Gulf region, raising a combined $1.2 billion, according to a recent EY report. Saudi Arabia accounted for nine of those listings, raising $724 million, while the UAE saw Parkin Company’s $429 million IPO on the Dubai Financial Market – the region’s biggest offering in the quarter.

The surge in IPO activity, which has seen nearly $50 billion raised since late 2020, according to Al Ramz Capital, has been fueled by a combination of factors, including a global uptick in listings, the region’s economic diversification efforts, and a growing appetite for public funding among private sector firms.

But as the region’s capital markets deepen, experts warn that companies must carefully evaluate the risks and potential pitfalls before pursuing an IPO.

When to not pursue an IPO

“It’s generally a bad idea to go public when the issuer has no real, genuine, underlying reason or need to do so, apart from making a quick buck,” said Amer Halawi, Head of Research at Al Ramz Capital.

One key red flag, according to Muhammad Shahid Nazir, Partner of Corporate Finance and Deal Advisory at Insights UAE, is unstable financials or uncertain performance. “Companies with unstable or uncertain financial performance may struggle to attract investors and maintain a stable stock price,” he told Arabian Business.

Lack of scalability is another potential deterrent. “If a company lacks a clear growth strategy or the ability to scale its operations, it might not justify the costs and scrutiny associated with being a public entity,” Nazir added.

Timing is also crucial, with adverse market conditions like economic downturns, geopolitical instability, or waning investor confidence posing significant risks to a successful IPO.

Even companies with robust financials and growth prospects must grapple with the stringent regulatory and compliance burdens that come with being a public company. “The regulatory and reporting requirements for public companies are stringent. If a company is not prepared to meet these obligations, it could face significant challenges,” Nazir warned.

Cultural alignment is another key consideration. “If the company culture is not aligned with the transparency and accountability expected from public companies, it could lead to internal conflicts and operational inefficiencies,” he added.

Gulf IPO boom to gather pace in 2024

Despite the potential pitfalls, the Gulf IPO pipeline remains robust, with 24 listings announced in the region so far this year, two-thirds of which are expected to take place in Saudi Arabia, according to Al Ramz Capital.

Among the firms reportedly eyeing IPOs are supermarket chain operator Lulu Group International, which is gearing up for a listing in Abu Dhabi with a possible dual listing on the Saudi bourse. Edtech firm Alef Education and Etihad Airways, which could become the first Gulf carrier to go public, are also in the IPO queue.

The flurry of activity underscores the region’s efforts to solidify its position as a strong industrial and investment hub, aided by incentives like discounted land rentals and electricity tariffs for qualifying companies.

If the IPO momentum persists, experts say, it could lead to broader economic diversification, enhanced investor confidence, greater global visibility for GCC markets, job creation, and the development of deeper, more resilient capital markets.

However, companies pondering a public listing must conduct thorough due diligence and prepare for the rigors of public ownership, from navigating market volatility and shareholder demands to managing reputational risks and dilution of control.

“As more companies consider going public, it is essential for them to carefully evaluate their readiness, market conditions, and strategic objectives,” Nazir advised.

With billions of dollars at stake and the region’s economic transformation hanging in the balance, the Gulf’s IPO aspirants must tread carefully – or risk squandering a rare opportunity to unlock their full potential.