Bloomberg: IPOX® Associate Muehlbauer Comments on Saudi IPO Retail Allocation Push
A recent Bloomberg article reports that the Saudi Capital Market Authority is facing pressure from banks to reconsider its push for higher retail investor allocations in initial public offerings. Financial institutions argue that the guidance to allocate up to 30% of shares to retail investors may weaken listing performance and limit foreign institutional participation. This debate comes as Saudi Arabia’s IPO market faces stalling volumes and lackluster post-IPO trading, with concerns that filling high retail quotas in a recovering market could require steeper discounts.
IPOX® Analyst Lukas Muehlbauer was featured in the article, cautioning that higher retail targets carry execution risks. He noted that negative headlines regarding "weak demand" could emerge if targets aren't met and highlighted the price sensitivity of individual investors.
"Issuers may need to offer higher discounts to ensure the full 30% quota is filled."
Full Commentary
To provide further context on the regulatory landscape, IPOX® is publishing the full correspondence provided by Dr. Muehlbauer regarding the localization push:
"The proposal to target a 30% retail allocation quota is likely a strategy to deepen Saudi Arabia’s financial markets. Still, it is an outlier globally and the closest example that comes to mind is India’s 35% model.
While India benefits from a much larger active retail base, it is worth noting that this investment culture was also fostered due to regulatory support for retail access. Even Indian regulators recently debated to reduce the quota to 25% to aid absorption but ultimately maintained it to avoid signaling any preference for institutions over small investors.
Therefore, the move could help to promote financial inclusion and create a stronger equity culture and in the long term. With many recent IPOs involving privatized state assets, the government could use these mandated allocations as a type of “citizen dividend”.
In the short term, targeting 30% retail absorption in a recovering market carries execution risks. For example, if retail demand falls short, it could generate negative headlines about “weak demand” before trading even begins. Also, since retail investors tend to be more price-sensitive than institutions, issuers may need to offer higher discounts to ensure the full 30% quota is filled.
Paradoxically, this could also have positive effects, as stronger underpricing drives larger first-day “pops”, generating the kind of positive media buzz that attracts new investors to the market.
However, this introduces a secondary risk if a significant portion of the retail book consists of short-term traders seeking to quickly monetize those initial gains, as the supply overhang could lead to volatile post-IPO performance.
To mitigate concerns about short term volatility, regulators might look at previous large privatizations such as Aramco, where retail investors who agreed to a voluntary lock-up period received bonus shares as loyalty incentives."
Read the full article by Laura Gardner Cuesta and Christine Burke on Bloomberg: Saudi Regulator Faces Calls to Review IPO Localization Push
