Why only one in three IPOs succeed in the GCC
A new report published by Iridium Advisors, entitled “The Renaissance of IPOs in the GCC” reveals the success rate of company listing and demystifies some common misconceptions about IPO winners and losers.
According to the report, only one-third of the 38 GCC IPO market debuts are successful. According to the study, just 38 percent of IPOs were priced adequately; and only 32 percent of companies traded within the typically desired share price range of 20 percent within the first 30 days of going public. Additionally, merely 31 percent of new listings outperform companies that are already listed in the longer term.
Iridium’s analysis of 457 initial public offerings in the GCC region between 2005 and 2021, benchmarked companies against three objective criteria of success:
Underpricing: the difference between the IPO offer price and the first-day closing price
Stabilization period: the 30-day period of price stabilization post-listing
Excess return: the relative company share price versus a country index over time
“It is very encouraging to see government-owned and private companies embracing public equity markets in the GCC,” says Oliver Schutzmann, CEO of Iridium Advisors and a co-author of the report. “With a well-thought-out program of new public listings, which is already underway, the region has the opportunity to re-energize its capital markets and attract foreign capital to diversify economic growth. Nevertheless, there is still a big mountain to climb to unlock the true capital markets potential of listed companies for both issuers and investors.”
Companies planning a public listing need to be aware of the high probability of disappointment and ask why this should be the case. Iridium’s analysis has identified three key areas that are commonly overlooked by company owners, directors and senior management that can play a part in improving the odds of success.
The first is the different dynamics at play in the primary (where shares are issued) and secondary (where they are traded) market. Successful issuers recognize that investors trade among themselves in the secondary market without any direct involvement from the company, and that their company is only worth as much as the last share price.
The second is a difference between pre-IPO and post-IPO investors. Companies whose share price outperforms its benchmark after the listing understand that there are different types of investors with varying motivations and interests.
And finally, the assumption that Public Relations and Investor Relations are synonymous. The purpose of PR is to generate short-term interest whereas investor relations attracts long-term investment.
Schutzmann concludes by adding, “The risk of value destruction is real for private and public sector companies in the GCC preparing for an IPO, SPAC, or a direct listing in 2022. It is, however, not inevitable. Key areas of focus to improve the chances of success are taking a long-term view in pre-IPO preparation, identifying the right type of investor, and developing the capability to create organic relationships with the professional investment community. These three steps can guard against major share price gyrations after a listing and will go a long way to ensure that the region’s companies – and their owners - are rewarded with the right valuation by the market.”