Dubai aims to set up an alternative stock market for small-to-medium sized firms in a bid to create more exit options for the region's private equity sector, the chief economist of the emirate's economic free zone said.

'To private equity investors this increases the exit mechanisms and exit opportunities,' Nasser Saidi, chief economist at the Dubai International Financial Centre (DIFC) told reporters on Tuesday.

An alternative or second-tier market allows smaller and mostly higher risk companies to float their shares by lowering the regulatory threshold in comparison to a main market.

Private equity activity in the region has sharply declined in 2009, even though an uptick in fundraising in the first quarter of 2010 could signal of a turnaround for the sector, an industry report showed on Tuesday.

One of the reasons behind the slowdown is that the regional market for initial public offerings (IPOs) has come to a near standstill since the global downturn, giving private equity firms far less options to make money on their investments.

Typically, private equity firms invest in a firm and then sell with a profit through an IPO on a stock market.

'Current volatility is likely to keep entities away from the markets, which is why we are predicting end of year and into 2011 for a return,' said Steve Drake, head of Capital Markets at PricewaterhouseCoopers.

The DIFC, Dubai's tax-free hub where most international companies have established themselves, would like to create an alternative, second-tier market which would allow small-to-medium sized businesses to seek a listing.

Saidi said it was too early to say where the market would be established, under which regulation it would operate and whether it would span different countries in the Gulf.

'We are talking to a number of parties, gauging interest from companies. There is the issue of market infrastructure, the issue of regulation, we're addressing all of these, it is a work in progress,' said Saidi, who also declined to give a timeframe for the initiative.

'I think we are still far away but it would certainly be useful,' said Phil Gandier, head of transaction advisory services at Ernst & Young Middle East and North Africa.

'But there is still a lot of work to do on the main board - the quality of the applications, transparency and corporate governance - before they start a second-tier market,' Gandier said.

Private equity investments fell to $561 million in 2009 from $2.72 billion in 2008, the report released by the Gulf Venture Capital Association showed. However, private equity firms in the Mena in the first quarter of 2010 raised $1.25 billion, 18 per cent more than the same period in 2009.-Reuters