How UAE equity markets can reach the next level of growth

Over the past three years, the UAE’s capital markets have increased their product offering, experienced a rapid increase in initial public offerings and attracted greater market liquidity, including strong inflows of global capital.

The exchanges are already punching above their weight among emerging markets and could enter a new phase of growth if they can attract more pure private-sector listings.

For this to happen, the UAE’s private investment ecosystem – from venture capital, through to private equity and late-stage capital – needs to develop further. There are promising signs that this is starting to happen.

The establishment of the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM) in the early 2000s began the process of promoting capital inflows to the UAE.

While there have been listings in many sectors, over the past two decades, banks and property firms have largely dominated the market in terms of scale, acting as major conduits for global capital to help finance national economic growth.

However, for capital markets to develop and function well, they require many factors to converge, including diverse and attractive investment opportunities, easy access and liquidity in securities trading, a strong governance framework and reliable information flows.

It is a continuous evolutionary process that can usher in a virtuous circle – where the more attractive a market is to investors, the more attractive it becomes for companies to list, and vice versa.

A concerted effort is currently under way to kick-start and maintain this virtuous circle. Over the past year, ADX and DFM have attracted IPOs from diverse sectors including health care, utilities, real estate, food and beverage, financial services, infrastructure and petrochemicals.

The product range is also increasing, with ADX launching a derivatives market in 2021, establishing a framework for special purpose acquisition companies and listing more exchange traded funds.

Global investors have responded positively to the resilience and dynamism of the UAE economy and demonstrated confidence in the market’s development. Last year, foreign investment on ADX increased 54 per cent to a record Dh24 billion.

Liquidity has increased significantly, aided by a healthy ecosystem of market makers and brokers, with traded values increasing 23 per cent in 2022.

The market capitalisation of the ADX and DFM reached record highs of over $910 billion in April 2023, up significantly from $670 billion in May last year.

Expressed as a percentage of nominal gross domestic product this stands at more than 180 per cent, well in excess of other key economies in the MEASA (Middle East, Africa and Southern Asia) region, such as Turkey and Singapore.

However, many IPOs and direct listings in the last couple of years have been for government-related entities, largely because these are the companies with sufficient scale and maturity to appeal to investors.

For the UAE markets to take the next step and introduce a wider array of listings, especially for high-growth companies, we need a vibrant private investment market to accelerate the development of firms into IPO candidates.

For example, while the Mena region – and in particular the UAE – is starting to foster tech innovation, only $18 billion was raised for venture and growth capital in the whole region in 2022.

So, what is being done to increase investment in private companies in the UAE?

Government-led strategies and policies have enriched the landscape and cultivated a supportive environment that spans a wide range of sectors. This is particularly the case in Abu Dhabi, where ADGM has expanded rapidly as a premier financial and business centre.

We have also seen the emergence of incubators and the wider start-up ecosystem, with entities such as Hub 71 leading the charge in bridging the gap and bringing global players closer to the local investment story driving this evolution.

Government-led initiatives such as Abu Dhabi’s Dh5 billion IPO fund are already actively supporting listings, and the ADX Growth Market has been relaunched to appeal to fast-growing SMEs taking their first steps as listed companies.

Against this positive backdrop, it would now be good to see late-stage capital providers enter the market and support companies as they prepare to launch their IPO process.

I believe that it’s just a matter of more investors becoming aware of the opportunity and more investment platforms being established to act as conduits, because there is a strong financial incentive in a successful IPO exit.

The valuation premium for publicly listed companies is generally widening. While the price to earnings ratio for the MSCI UAE index increased to 13 times at the end of 2022 from 11 times in 2020, private company valuations have been constrained by the relative shortage of venture and growth capital.

A healthy private investment and IPO market bring substantial rewards to companies and the wider UAE economy.

Listing on the ADX and DFM opens up opportunity for debt and equity financing at a lower cost of capital and provides a shop window for companies, enabling them to enhance their profile, increase brand equity and forge new business partnerships.

The next phase of capital markets growth will certainly support the sustainable growth of a diversified economy, job creation and innovation.

Russell Read is co-founder of MEASA Partners