Dubai's Crown Prince Sheikh Hamdan Bin Mohammed on Tuesday said a new stock market for small and medium-sized enterprises, the Nasdaq Dubai Growth Market, is being rolled out. Trading is expected to begin early next year following the listing of the first company's shares on the new bourse. Although the UAE already has three stock exchanges – the Abu Dhabi Securities Exchange, the Dubai Financial Market and Nasdaq Dubai – this will be its first junior market geared towards smaller companies.
What are junior markets?
Junior markets are exchanges that typically make it easier for smaller (and younger) companies to list. Dozens of exchanges around the world have junior markets including bourses in London, Frankfurt, Hong Kong, Mumbai, Singapore, Johannesburg, Buenos Aires and Sao Paolo. Saudi Arabia's Tadawul Exchange launched its parallel market for smaller shares, Nomu, in 2017.
Why would SMEs want to list on a junior market?
One of the biggest challenges for smaller companies, especially those growing quickly, is access to capital. They can seek funding from venture capitalists, but those holding the cheque books often get to dictate terms, including the size of stake SME owners have to give up in return for cash. The growth market is aimed at offering a relatively cheap and easy way to tap investors for capital, but companies in return have to open their books and accept greater scrutiny.
Why would they want to list in Dubai?
The new exchange is part of the Dubai Future District initiative first announced in January under which the government is rolling out a range of incentives to attract new economy companies. These included a Dh1 billion ($272.48 million) new economy fund, legislative licences to use technologies such as autonomous cars, drones and AI, five-year residency visas and reduced housing prices allowing entrepreneurs to rent homes in the district for less than Dh3,000 per month. Then there is the availability of capital. Dubai "is the financial hub of the region", Ali El Adou, head of asset management of Daman Investments, said.
Who can list on the new exchange?
The market is open to companies with a value of less than $250m. They need to provide at least one year's accounts prepared under International Financial Reporting Standards. They can sell as little as 25 per cent of their shares but need to agree to hold on to any shares not floated for at least 12 months and cannot buy back shares for two years. SMEs will also need to hire (and retain) a compliance adviser for a listing and pay a $10,000 fee to the exchange to file a prospectus, as well as a $10,000 annual fee. A company is no longer considered to be an SME if its market value remains above $500m for 90 days.
Is investing in small companies a good idea?
It depends on the circumstances. Investing in smaller companies is much riskier than buying shares in big businesses, especially if an investor buy shares in just one (or a handful) of companies. And trading in small-cap shares can be illiquid, making them more difficult (and expensive) to sell.
However, research by US economists Eugene Fama and Kenneth French show that over time, smaller companies tend to outperform larger ones. Although the huge leaps in valuations made by technology giants like Amazon, Apple, Facebook and others means this hasn't been the case over the past decade, over 20 and 50-year periods smaller companies provide better returns.