saudi; king abdullah financial district; riyadh city

Unlocking opportunities for MENA IPO landscape in the new investment climate

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Investors are feeling hopeful about IPOs because of three main trends: companies are raising more money, improving their governance and planning for future leadership.


In brief

  • A strong equity story and robust governance are key to attracting investor interest and confidence during the IPO process.
  • Accurate financial reporting and effective ESG integration are key to building trust and gaining a competitive advantage.
  • Strategic timing of the IPO and awareness of external risks are important for optimizing performance and boosting investor confidence post-listing.

As companies strive to attract investors and maximize valuation, crafting a compelling equity story and demonstrating strong governance are essential. Going public and implementing a successful IPO can bring great chances for success, but the journey is filled with opportunities as well as challenges.

This article is based on a survey conducted during "Roadmap to a Successful IPO for Finance Executives" conference, which aimed to assess participants' interest in IPOs and their views on capital markets in the MENA region. The conference focused on networking, understanding challenges and identifying trends among companies preparing for an IPO. The survey results offer key insights into the goals and strategies of Saudi Arabian companies, helping them in their journey toward public listings and financial success.

Past IPO trends indicate that private sector entities have been instrumental in the diversification of Saudi capital market, through active participation in capital market transactions. Seventy-four percentage of finance executives are currently either exploring or contemplating an IPO, while 23% of the executives are at an advanced stage of pursuing an IPO. Less than 5% of the executives had already completed an IPO process.

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Seventy-nine percentage expect that the Europe, Middle East, India and Africa (EMEIA) region will observe the highest growth in the number of IPOs during 2024 and 2025, followed by the Americas and Asia-Pacific (APAC) region. The responses are in line with what is being observed: EMEIA has shown a remarkable comeback, achieving its highest global share in the number of IPOs since the 2008 financial crisis, on the back of major European listings and strong activity in India. The Americas too have seen robust growth, with a notable increase in IPO proceeds. The APAC region has faced headwinds on account of geopolitical and economic challenges. Geopolitical tensions may compel businesses to explore alternative IPO markets and more favorable regulatory environments. Finance executives forecast divergent paths for the KSA IPO valuations in 2024–25, driven by investor sentiments, past performance, growth prospects and market conditions.


Setting expectations for an IPO


To attract investors, an IPO must offer a competitive valuation. Key factors that can impact an IPO valuation include industry outlook and stability, growth prospects, favorable market conditions, company's track record and past performance, regulatory compliance, quality and experience of the management team and corporate governance practices.


Investors scrutinize and closely examine factors such as revenue trends, profitability, market share, strategic positioning and overall growth trajectory to assess the company’s growth potential. A strong historical track record along with a robust equity story is likely to lead to a higher valuation for an IPO. Fifty-one percentage of executives believe that valuations will improve, leading to more IPOs in the KSA during 2024–25, while 34% believe that valuations will be stable and 15% think that valuations will fall.

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Saudi Arabia’s Vision 2030 economic reform program continues to attract investors and drive IPO activity. Government initiatives to privatize state-run companies are also expected to further support IPO valuations. Lastly, family businesses looking for sustainability of their legacy and/or securing succession are likely to contribute to IPOs in 2024–25. However, external factors like oil price volatility and global economic conditions could hamper and negatively influence investor confidence and IPO performance.

Key factors leading to successful IPO

A robust equity story is always fundamental for attracting investors. Management and investors must consider a realistic value of the company at pre-IPO stage. Shareholders will be reluctant to sell a piece of the company at a discount. Right timing is a key success factor for a company going for an IPO. The position of the company within its life cycle will determine its future trajectory based on the expected performance and growth. For instance, the timing of an IPO to coincide with expansion phase of a company may help to attract investor interest.

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A company's readiness for an IPO depends on several crucial factors, including financial performance, regulatory compliance and operational maturity. Ensuring alignment across these areas is essential to successfully navigate the IPO process and attract potential investors. Company’s readiness for an IPO involves several key factors including, but not limited to:

  1. Establishment of a robust corporate governance framework and development of a comprehensive investor relations strategy, especially to update investors on operational milestones and financial performance.
  2. Key management experience and capability to effectively deal with roadshows and investor calls.
  3. Financial reporting that is accurate, reliable, transparent and compliant with the applicable IFRS standards and regulatory requirements.

Challenges to anticipate on the IPO journey

Investors trust in a company pursuing an IPO can be significantly impacted by several factors including, but not limited to, company valuation, management experience, governance structure, and the cyclical state of company financials. A management team lacking experience can raise red flags for investors, potentially leading to loss of investment interest.

Similarly, poor governance structures can deter investors, as exemplified by Enron's collapse in the early 2000s due to weak governance. Lack of transparency can also erode investor trust, as seen in the case of Theranos, which faced repercussions after misleading investors about its technology.

Seventy-six percentage of finance executives believe that a loss of investor trust, regulatory issues, management reputation and poor past performance collectively contribute toward the failure of an IPO.

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A history of regulatory breaches can severely damage a company’s reputation. According to EY “Guide to Going Public,” institutional investors base an average of 60% of their IPO investment decisions on financial factors — in particular, growth in earnings per share (EPS), revenue, profitability and earnings before interest, taxes, depreciation, and amortization (EBITDA) — and an average of 40% of their IPO investment decisions on non-financial factors, including the quality of corporate strategy and its execution, management credibility, operational efficiency and corporate governance.

Forty-three percentage of financial executives believe that developing the right equity story is the biggest challenge for an IPO, while 40% believe that building the right management team mix is the biggest challenge.

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Recent IPO activity in the KSA shows that corporates with excess liquidity are focused on strategic, value-enhancing deals to strengthen their positions. A solid, scalable business model with clear growth prospects is fundamental to an equity story, as investors seek companies with long-term growth potential and value creation. Key elements that strengthen a persuasive equity story include the company’s value proposition, future expansion plans, financial stability, growth potential, and market potential, along with the reputation and experience of the management team, which significantly enhances investor confidence in both the company and the IPO.

Quality, reliability and timeliness of financial reporting is another challenge most of the companies and institutions face.

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Compiling and presenting historical financial information in a manner that meets public market standards can be very challenging. Many private companies lack robust internal controls, and their financial systems are not ready to present reliable external information for public scrutiny. Additionally, most private companies are not used to the rigorous financial reporting timelines that are applicable for public companies.


Investors rely on the financial information to make informed decisions and regulators use it to ensure compliance with laws and regulations. Investors, regulators and other stakeholders expect transparency in financial reporting. Companies must provide clear, comprehensive and understandable financial information. In preparing for an IPO, management must critically analyze and evaluate the financial statement closing process and make changes appropriately to ensure both timeliness and quality standards are met when they become public and report externally.


Another challenge in an IPO is ensuring comprehensive financial reporting and regulatory compliance. Sixty-two percentage of respondents consider financial reporting and regulatory compliance the most scrutinized areas for CFOs of listed companies, while 19% believe forecasting and investor communications are, and 13% cite risk management and internal controls.

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Accurate and transparent financial reporting, along with strict regulatory compliance, is essential for building investor trust and safeguarding a company's reputation. Listed companies are typically required to report their financial results in accordance with a pre-defined accounting framework, such as IFRS, and within regulator-prescribed timelines. Delays in filing or failure to prepare statements according to approved standards can lead to financial penalties and legal risks. For public companies, adherence to these requirements is vital to maintaining confidence in their CFOs. Moreover, accurate forecasting plays a critical role in setting realistic revenue and growth targets, which helps companies meet or exceed market expectations, contributing to stock price stability.

Impact of ESG integration on IPO valuations and competitive advantage

In recent times, ESG-focused companies often attract a broader base of investors, including those who prioritize sustainable and ethical investments. This can increase demand for the IPO, potentially leading to higher valuations. To gain competitive advantage, entities should integrate ESG considerations into its long-term strategy, value creation and equity story. EY Global IPO trends report identified ESG as a key theme since a number of years for IPO candidates and investors. There is a growing expectation from investors, consumers and regulators that companies going public integrate ESG reporting into their equity offering. The EY Global CEOs survey reveals that CEOs aim for a net-zero future by decarbonizing their business and creating new revenue streams in the longer term.

Twenty-nine percentage of respondents believe ESG plays a vital role in IPO process to meet regulatory requirements and 42% believe that ESG is important to meet expectations of investors and other stakeholders.

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Summary

A successful IPO requires a compelling equity story, strategic timing and strong governance to attract investors. include showing growth potential, transparent financial reporting, and meeting regulations. ESG is becoming important for investors focused on sustainability. In Saudi Arabia, Vision 2030 is boosting IPOs, especially from family businesses and privatization. However, market volatility and geopolitical risks pose challenges. Success depends on readiness, strategic planning and aligning the IPO with investor expectations in a fast-changing market.
 

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