Why the time is right to go for an IPO on the PSX

Published April 2, 2021
Over the past 12 months, technology stocks listed on Pakistan Stock Exchange are up 500pc. – Image courtesy Shutterstock
Over the past 12 months, technology stocks listed on Pakistan Stock Exchange are up 500pc. – Image courtesy Shutterstock

There are more companies in the pipeline to go public on the Pakistan Stock Exchange (PSX) this fiscal year than the total number of companies listed over the preceding four years.

This is quite an encouraging indicator of the improving health of the economy in general, and capital markets in particular.

Number of expected IPOs in 2021 exceed those in the past four years combined.
Number of expected IPOs in 2021 exceed those in the past four years combined.

Not only is there an increase in demand, visible from the rise in retail investor participation, but it is also accompanied by an increase in the supply of good quality companies.

For instance, Service Global Footwear – the shoe company – has announced its intention to raise $10 million by listing on the PSX this month. Panther Tyres listed earlier this year.

The primary purpose of a stock exchange is to act as a venue where entrepreneurs can raise capital for their businesses. But i feel that this raison d'etre has gotten lost somewhere. For example, in the year 2020, the three companies which raised capital through the stock exchange raised $34m.

In comparison, startups in Pakistan raised around $94m through private capital rounds. This means that companies are preferring raising capital privately rather than through the public market. Usually, it is the other way around.

PSX suffers from a brand or PR issue as well. In the popular public narrative, the stock exchange is more commonly known for the secondary trading of stocks rather than a place for companies to raise equity capital for their growth.

In the public’s mind, it is akin to a gambling casino, where people will bet on the direction of stocks, rather than a marketplace to connect savers with business ventures. This image is further supported by larger-than-life personas of some brokers.

Most people associate the stock market with brokers rather than with the companies listed on the exchange. This is of course neither a fair nor an accurate representation.

But new IPOs will solve some of these issues for a host of reasons.

Firstly, they would help investors focus on the quality of the company, its financials and plans for the capital raised.

Secondly, successful capital raises would set a precedent for other companies to use the exchange for their financial needs. Equity is usually a cheaper source of funding compared to loans. It is also a more suitable asset class, as it aligns the interests of the entrepreneur and the investors.

Thirdly, it will help bring in savings into more productive assets, rather than being trapped in real estate, gold or government borrowing.

Over the past five years, 15 companies have listed on the PSX. Around 67 per cent of the IPOs had positive stock performance in the first week after listing – in line with global trend of the IPO “pop”.

AGP is the best performing IPO over the last five years with its share price up 53pc since its listing in March 2018. The Organic Meat Company was the best performing company post IPO in 2020 (share price up 30pc). Avanceon has been the best IPO over the past ten years.

Over the past eighteen months, the Securities and Exchange Commission of Pakistan (SECP) has taken a lot of steps to improve the ease of doing business and facilitate healthier markets.

This is a marked improvement, especially compared to the 2008-2018 period, when the regulatory regime was quite stifling and suffocating. One of the initiatives of the SECP is the launch of Growth Enterprise Market (GEM), a new board on the PSX, where earlier stage growth companies can raise capital from institutional and accredited investors.

I believe this is a major game-changer and hasn’t received enough attention yet which it certainly deserves. Junior boards such as AIM in the UK, Nasdaq in the US and STAR in China are very successful venues to raise capital. GEM can provide a similar platform, especially for startups in Pakistan.

The listing rules on GEM are much simpler than the mainboard and it is also substantially cheaper to go public. Loss-making companies and greenfield projects can also list on GEM to raise growth capital.

Over the past 12 months, technology stocks listed on Pakistan Stock Exchange are up 500pc. This shows that there is a “scarcity value” – increase in an item's relative price by an artificially low supply – coupled with strong demand from investors for exposure to the technology sector.

In my view, this makes for an attractive window of opportunity for technology companies to use the GEM market to go public and raise capital.


Ali Farid Khwaja, CFA, is the Chairman of KASB Securities. He lives in London with his wife and two daughters. He has worked in financial markets in the UK and Europe for over 17 years. He is an alumnus of Lums and was a Rhodes Scholar at University of Oxford.

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