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IPOs: Why this could be the time to go public

Francesca Cornelli, Professor of Finance at London Business School, comments:

“Periods of higher uncertainty provide firms with sound investment prospects with a better opportunity to go public. All firms can go public during “hot” periods due to favourable market conditions that elevate valuation figures, making it difficult for the most promising firms to differentiate from their competition.

“There has been much speculation in the market about how the fall in oil prices affects the GCC IPO market. Broadly speaking, it is easy to conclude that lower oil prices will make a less favourable environment for IPOs. As markets are irrational and follow momentum, the window for IPOs is generally closed during such conditions.

“However, times of high uncertainty can also result in better opportunities for the best firms to draw attention to their superior potential for growth, in particular because the real option component of the value will increase with uncertainty.

“The current IPO landscape in the UAE is in fact positive. Research shows that IPO waves preceded by a period of high stock returns are generally followed by low returns for the firms going public, while IPOs following increased market uncertainty are actually characterised by high real option value, resulting in good returns.

“Therefore, although the low IPO prices may discourage firms from going public, those who do go public might very well deliver good returns to the investors buying their shares.”

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