Tough IPO rules deter UAE tech startups from listing

February 19, 2024

People speak in the lobby of the Dubai Financial Market. Strict IPO rules mean loss-making startups cannot go public

Proof of two years’ profit required
Loss-making startups shut out
Expert predicts ‘modified’ rules

The UAE’s burgeoning startup sector has helped it become a centre for tech innovation, yet almost none of these fledgling companies have gone public due to stock market regulations.

Since 2021 the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) have welcomed a flurry of initial public offerings as part-privatised government-related companies diversify and increase the total capitalisation of their bourses, raise money and attract more investors.

There were eight IPOs in the UAE last year – six in Abu Dhabi and two in Dubai – and at least five more are expected in 2024, according to consultant EY. Of last year’s, six were government-related companies.

Startups often take several years to turn profitable, not just in the Gulf but worldwide. Uber racked up $30.6 billion in cumulative losses from 2009 to 2023, for example, but has a market cap of $142 billion, up from its 2019 IPO valuation of $82 billion, as investors bet it will become profitable in the long term.

Such a listing would be difficult in the UAE, where companies must submit financial accounts showing they have made a net operating profit for the past two years.

As such, high-growth, loss-making startups – which is typical for new companies, especially those specialising in nascent technology and services – cannot go public.

These restrictions will be eased eventually, experts believe. Over the past two decades, the UAE’s rules and procedures regarding IPOs have become significantly more sophisticated, said Ibrahim Masood, senior director of equity portfolio management at Mashreq Capital in Dubai.

Could the rules be modified to address businesses at different points in their life cycles? Yes, they could
Ibrahim Masood, Mashreq Capital

“We’re now following institutional global best practice, but could the rules be modified to address businesses at different points in their life cycles? Yes, they could,” he said.

Masood cited AIM, a sub-market of the London Stock Exchange for small- and medium-sized “growth” companies, as a model the UAE could emulate.

“The idea is that companies which don’t meet the criteria for the main bourse can go public at an earlier stage when normally only private equity investors would have access to that kind of company,” said Masood.

“Investors can buy shares in these companies with the understanding that these have a higher risk-return profile.”

The ADX has four listed tech stocks, although two – Presight AI Holding and Bayanat AI – are ultimately controlled by the emirate’s government. The DFM has no technology sub-index, reflecting the lack of such companies on the bourse.

That contrasts with Saudi Arabia’s Nomu, or parallel stock market, which has about 80 listed companies and around a further 40 applying to do so. Joining requirements are laxer, with companies needing to be operational for at least one year.

The UAE and Saudi Arabia’s part-privatisation programmes are a precursor to then enabling more private sector companies to go public, said Tamer Azer, a partner at Shorooq Partners, which has about $350 million of assets under management and invests in startups mainly in the Middle East and North Africa.

“If you start by listing the household names like MBC, Adnoc, Aramco and many others, this will attract more retail and institutional trading interest, and this greater market activity can then support having high-growth technology companies list too,” Azer said.

“You can’t list relatively smaller tech companies in a market with little liquidity. First create liquidity and investor interest then expand the offering.”

Since 2020, policymakers have prioritised making UAE stock markets more diverse in terms of listed companies to try to attract greater foreign investor participation, said Marwan Shurrab, managing director of Alpha Advisory in Dubai.

“I don’t rule out any potential deviation from the strategy in the future, but the focus at this stage is still to create a market that will be a supportive environment for capital inflows,” he added.

The sizeable amount of private equity money deployed across Mena, with UAE startups among the biggest recipients, shows there is appetite among institutional and wealthy individual investors to buy into early-stage, higher-risk companies, said Mashreq’s Masood.

“I’d be very surprised if there wasn’t similar interest if companies at this stage of their development were to do IPOs,” he added.