Following a number of recent successful direct listings on the Qatar Exchange, a clear trend has emerged.
Qatari private companies now have multiple viable paths to going public. In this article we discuss recent listings on the Qatar Stock Exchange and note additional options that have not yet been exercised but remain open to suitable candidate companies.
Over the past decade, most listings on the Qatar Stock Exchange have followed a familiar template. Large private companies would previously execute an initial public offering (IPO) of their shares to the Qatari public. Assuming a successful and fully-subscribed IPO, the company would list its shares on the Main Market of the Qatar Stock Exchange. Most of these IPOs and subsequent listings would be structured through the creation of a new company (NewCo), organized as a Qatar Public Shareholding Company under the Commercial Companies Law (QPSC). This NewCo would be created solely for the purpose of the IPO and listing, and would acquire the entire share capital of the existing operating company. The QPSC's share capital would match the valuation of the operating company (whose nominal share capital would remain untouched), and IPO shares would be priced accordingly to investors.
IPO investors would directly hold shares in the QPSC holding company, and indirectly hold ownership of the existing operating company, which would normally have a solid track record of profitability and/or growth. The IPOs and listings of Baladna, QAMCO, and Mesaieed all followed this template.
A slight variation of this template occurred in 2020/2021 in connection with the IPO and listing of QLM (part of the Qatar Insurance group). In the IPO and listing of QLM no new QPSC was created and the existing operating insurance company was converted from an LLC into a QPSC. No new shares were created, so in order to reflect the difference between the nominal value of the company and its market value (which had grown over the course of the company's life), IPO shares were priced at a premium to nominal value.
The Second Market is mentioned alongside the Main Market in the 2010 QFMA Listing Rulebook, but no listings occurred outside of the Main Market until 2021. Following the issuance of the QFMA Listing Rulebook of 2021, two listings have occurred on the Second Market, now called the Qatar Equities Venture Market (QEVM or Venture Market). Both listings were achieved through the direct listing method, without an IPO process prior to listing.
Although both Venture Market listings have occurred without an IPO, there is nothing in the New Listing Rulebook mandating the use of direct listings for Venture Market companies. Companies listing on the Venture Market are also free to IPO their shares prior to listing, and companies listing on the Main Market are likewise free to opt for direct listings without IPO. Similarly, companies may go public on either market by converting their existing companies or creating new QPSCs to acquire those existing operating companies.
The Venture Market and Main Market provide the same level of flexibility with respect to structuring offerings and listings; the principal difference between the two markets is the criteria for issuers. The Main Market has stricter requirements with respect to track record, capital structure and other factors. The Venture Market's criteria are less strict, making the Venture Market a realistic venue for younger Qatari companies, including start-ups, who cannot satisfy the requirements for listing on the Main Market. For example, the Main Market requires that issuers have at least 40 million QAR in paid up capital, at least 2 years of operating history, and a minimum 5% profit margin in the most recent financial year; the Venture Market only requires a paid up capital of 2 million QAR; 1 year of operating history; and no profitability requirement.
To underwrite or not to underwrite?
The 2010 Listing Rules did not make reference to the role of underwriters or underwriting. Unsurprisingly, none of the Qatar IPOs of the 2010s were underwritten. Instead, companies relied on their offering managers to properly gauge investor appetite; the size and pricing of the offerings would be structured appropriately to avoid undersubscription. The New Listing Rules explicitly address underwriting and provide the Offering Manager the right to act as Underwriter, assuming the securing of appropriate licenses to perform that activity.
Underwriting presents some advantages and disadvantages for issuers. On the one hand, having an offering entirely (or at least largely) underwritten may shift the risk of undersubscription from the issuer to a third party (the Underwriter). On the other hand, in exchange for accepting this risk, underwriters are likely to demand a significant discount on the offering price, and this could result in the issuer "leaving money on the table" if the underwriter is able to unload their offer shares onto third party investors for a large profit.
As no offerings have been underwritten in Qatar over the past decade, it is difficult to predict whether parties will avail themselves of this option. Furthermore, as there is no market precedent for underwriting, it is possible that issuers and would-be underwriters may not be able to agree on the details of any underwriting arrangement.
Valuation and Book Building
In addition to new references to underwriting, the New Listing Rules have included long-discussed provisions with respect to the book building process. Under the book building process, the issuer and its advisors attempt to determine the value of the company's shares by communicating with large potential investors and gauging their interest in the company. The book building process stands in contrast to the independent valuation method, which is the method that has applied to pricing offerings since the 2010 Rulebook.
Over the past decade, pricing of offerings has included the close involvement of independent valuators applying typical methods of valuation—book value, discounted cash flows of projected earnings, and market comparables. Although Offering Managers/Listing Advisors have naturally considered market sentiment (essentially an informal book building exercise), those considerations would in theory have to be consistent with the results of valuations performed by independent valuators and approved by the regulators in Qatar.
Under the New Listing Rules, issuers may rely instead on the book building process when deciding how to price and size the offering. Even direct listings could employ the book building process in order to reach a listing "reference price", the price at which shares would first change hands on the day of listing.
The New Listing Rules have introduced global concepts to the Qatar capital markets. Direct listings, book building, underwriters, liquidity providers, venture market and other concepts may soon become common for local offerings and listings. In particular, recent direct listings on the Venture Market have established an encouraging precedent for companies that may not have considered going public under the previous listing rules.