Bourse tie-up gives private equity an exit

Best of both worlds for companies through lower flotation threshold, liquidity access

The pending merger of the Dubai Financial Market (DFM) and NASDAQ Dubai appears to create a loophole that will allow private equity firms to unlock the value of their investments. NASDAQ Dubai requires a company to float only 25 per cent to go public on that exchange. The DFM has a 55 per cent flotation threshold for companies to be listed there.

After NASDAQ's merger with the DFM, NASDAQ-listed companies that went public with a 25 per cent flotation would be able to trade on the DFM without meeting its higher flotation requirement. The merger allows companies to have the best of both worlds - a lower flotation and access to greater liquidity. "If the valuations are right we probably will consider a listing in the future," said Raza Jafar, the vice chairman of Emirates Investment Group.

Anis Bibi, the executive director at Shuaa Partners, the private equity arm of Shuaa Capital, expressed similar sentiments. "If the mechanism works, everyone including ourselves will consider this as a valid exit route," Mr Bibi said. Private equity firms in the region were in buying mode for years but are now under pressure to exit their boom-time investments. But poor market conditions and the lack of liquidity since the onset of the financial crisis in the autumn of 2008 have made it difficult for them to cash out.

"The possibility of strategic sales, or partners buying out other shareholders, is limited. We don't really see acquisition financing market opening up," said Sanjay Vig, the managing director at Alpen Capital in Dubai. Mr Vig's company represents more than 50 family-owned companies in the region. "Our advice to clients is that if they are looking to divest, an initial public offering is a better market." Alpen Capital last week received formal approval to advise companies looking to list on NASDAQ Dubai, he said. The new option became possible because of the DFM's takeover of NASDAQ Dubai. The DFM has delivered two thirds of the purchase price and said last week the deal would be finalised "in due course" after the back-office operations were consolidated.

The listing loophole was first presented publicly last week, when Khalid Kalban, the chief executive of Dubai Investments, told Bloomberg that he hoped to list 30 per cent of his company's private equity unit, M'Sharie, on NASDAQ Dubai and trade on the DFM. A DFM official confirmed last week that NASDAQ Dubai shares would be traded through the DFM platform, even though they would not technically be listed on DFM.

Initial public offerings have slowed dramatically across the Gulf after peaking in 2007. There have not been any in the UAE this year and even with the new option, investors and analysts do not see any listings as likely before the middle of next year. "There is pressure on private equity to exit investments but they are also pressured to get the right valuations, which I don't think will improve before the middle of next year," Mr Jafar said.

And since there is hardly any risk appetite in the market, analysts see only high-quality assets receiving investor attention. Still, buyout firms welcome the potential new source of capital. The private sector has struggled to raise funds from the debt market, so the sale of shares on favourable valuations could be welcome. "This offers a very good opportunity for private investors. It's an opportunity to exit and grow businesses," Mr Jafar said.