As most of the countries in the region of the Middle East eye for aggressive economic diversification, they are witnessing a massive boom in one crucial arena named ‘Initial Public Offering’ or IPO. As per the reports, the sector, which saw a record-breaking 2022, has raised USD 6.8 billion through 29 offerings during the first nine months of 2023.
Although the ratio has witnessed a 56% decline in value, compared to the first nine months of 2022, it is still impressive amid the ongoing economic headwinds like geopolitical risks, higher interest rates and inflation. As per the Kuwait Financial Centre, in a similar period in 2022, IPO issuers raised USD 15.6 billion through 30 share floats.
The UAE has been the most active in the MENA (Middle East and North Africa) region for IPO activity, and in fact, is now catching up to the world’s biggest economy the United States. As of October 2023, the US has generated $8 billion in IPO value, whereas the UAE stands close second with almost $7 billion.
“This is a milestone for the UAE, with its robust financial regulatory framework, ironclad anti-money laundering protection and substantial firepower from a capital perspective,” Ryan Lemand, co-founder and CEO of Neovision Wealth Management in Abu Dhabi, told The Circuit, while adding, “Strong retail investor appetite for IPOs and high retail investor-to-population ratios, help in making most IPOs successful.”
What’s the overall scenario?
As of October 2023, the UAE is expecting around 11 IPOs by year-end, thereby infusing $2 billion more in the capital market, with Ernst and Young predicting, “As valuation gaps narrow, investors are reviewing the post-listing performance of the new cohort of IPOs, which, if positive, could renew market confidence.”
Talking about MENA, the volume of IPOs getting registered on regional bourses has reportedly climbed by 44% on an annual basis, with Saudi Arabia and UAE being the show stealers.
“The number of IPO transactions rose to 13 during the three-month period to the end of June 2023, bucking the global slowdown in equity capital markets activity. However, proceeds from MENA listings dropped by 80% to $1.8 billion,” stated EY in its MENA IPO Eye Q2 2023 report.
“The second quarter of 2023 confirmed that MENA IPOs are not experiencing the downward trend witnessed globally. The UAE and Saudi Arabia continue to be the most active markets in the MENA region in terms of both the number and size of IPOs,” mentioned Brad Watson, EY MENA strategy and transactions leader, as he gave a thumbs up to the ongoing trend.
As of October 2023, the MENA region is having strong economies with low debt levels, something, coupled with the government-level reform and deregulation, is making the markets in this part of the world an attractive destination for IPO listings, Watson noted.
EY noted that Saudi Exchange, the biggest by market cap in the Middle East, led the IPO volume growth, as four listings on the main market raised $800 million, while seven IPOs on its parallel Nomu market secured $100 million in total proceeds. Jamjoom Pharmaceuticals was the biggest IPO deal in the Kingdom during the 2023 second quarter, by raising $336 million. This was followed by First Milling Company, which raised $266.4 million. Both ventures offered 30% of their share capital to the public in deals that were reportedly oversubscribed.
In the neighbouring UAE, the Abu Dhabi Securities Exchange hosted the largest MENA IPO of the quarter, with Adnoc L&S raising $769.5 million.
“The IPO saw the largest demand globally for a transaction so far in 2023, with an oversubscription level of 163 times in aggregate – the highest oversubscription for a UAE book-build IPO,” EY said, while noting that Al Ansari Financial Services was the other major listing in the Emirates. In fact, Al Ansari Financial Services became the first family-owned business to list in the UAE, as it raised $210.4 million through its public float on the Dubai Financial Market.
To sweeten the matters, MENA economies, especially the ones in the six-member economic bloc of the Gulf Cooperation Council (GCC) have bounced back strongly from the COVID-driven slowdown, a trend, which along with volatility in oil prices, is also driving IPO activity in the UAE and Saudi Arabia.
“Overall, 12 companies in the UAE alone listed in 2022, raising $11 billion, in addition to the joint Abu Dhabi-Riyadh listing of MENA food franchisee Americana, which reaped $1.8 billion. The listing of Dubai Electricity and Water (Dewa) was the largest GCC IPO in 2022, raising $6.1 billion,” EY stated further.
Borouge, the joint venture between Adnoc and Austrian chemicals producer Borealis, along with Abu Dhabi Ports Group and healthcare provider Burjeel Holdings, were among those that listed shares on the ADX. Overall, Middle East IPOs raised over $23 billion in 2022, the highest aggregate value for the region after 2019, when Saudi Aramco went public in a $29 billion offering.
In the first half of 2023, the number of MENA IPO deals reached 23, a 4% year-on-year slide, all of which were in the Gulf region with total proceeds of $5.2 billion.
The IPO value has also been contracting in the broader Europe, Middle East, India and Africa region in 2023, whereas MENA is defying the trend with a promising capital pipeline for the rest of 2023, EY noted.
Some 23 Saudi companies announced listing plans on the Tadawul for the second half of 2023. EY also saw two Egypt-based companies intending to list in the exchange, as the country prepares to privatise state-owned enterprises.
In fact, Public Investment Fund (PIF), the sovereign wealth fund of Saudi Arabia, which has total estimated assets of $776 billion and has been tasked with the job of investing funds on behalf of the Kingdom’s government, is proactively driving the aggressive IPO listings in the country. Be it the oil and gas firm ADES or the Kingdom’s largest medical procurement firm, Nupco, you can see the tactics of listing several portfolio firms and then guiding their IPO activities paying rich dividends for the Kingdom’s government, as they eye aggressive economic diversification by 2030.
Factors helping the IPO boom
Gulf’s ‘IPO Spring’ should be credited to critical factors like robust GDP growth attracting investors, apart from reflecting the region’s overall economic strength. In fact, this region has been performing in a superb manner despite the ongoing geopolitical headwinds. The factor has now resulted in a rise in passive index investments and favourable index weights for Gulf’s stock markets.
Oil and gas contribute to less than 40% of GDP in most Gulf countries, apart from making up 30% of the UAE’s economy and 18% of Bahrain’s GDP in 2022. In the same year, the GCC economies displayed remarkable resilience and growth, with a robust 7.5% expansion. Despite the oil market volatility in 2023, the region is showing tremendous resilience and along with fintech advancements, is offering the perfect stage for innovation for the digital trading platforms. Not to forget that the fintech revolution lies at the heart of Gulf countries’ diversification efforts.
Regional stock exchanges are also expanding their reach. Dubai Financial Market has introduced its futures market. Saudi Arabia and the UAE have been developing their Sharia-compliant Islamic finance sectors (another growth engine), offering financial products like Mudarabah (profit-sharing), Murabaha (cost-plus financing), and Ijarah (leasing).
Saudi Arabia and the UAE already have thriving Islamic fund industries, which offer equity, real estate, fixed income and sukuk funds adhering to Sharia principles. Through fintech, the Gulf powerhouses are consolidating and fine-tuning their Islamic fund industries further. While the Islamic insurance model, takaful, is widely available in Saudi Arabia and the UAE, and known for covering insurance needs, sukuk has now become the Islamic alternative to conventional bonds, thereby broadening investment options and attracting a global investor base.
UAE has also emerged as a regional leader, in terms of improving market infrastructure, including both online and offline trading platforms and settlement systems, thereby enhancing market efficiency. For example, Abu Dhabi’s investment holding company ADQ has launched the ‘Q Market Makers programme’ to grow liquidity on the Abu Dhabi Securities Exchange, while Dubai followed it up by introducing ‘xCube’, in order to promote market maker activities on the Dubai Financial Market to attract capital. Following that, The DFM’s average daily trading volume reached Dh347.25 million in the first half of 2023, surpassing the volume from June to December 2022, which was Dh279.81 million.
Institutional investors are taking note of these positive reforms, as they have contributed approximately 78% of the total trading volume in DFM and Abu Dhabi Securities Exchange, since the 2023 beginning.
And now you have state-backed entities, government incentives, and foreign investor interests coming together and fuelling Gulf’s IPO growth. Experts see initiatives like Qatar’s market-maker programme, Qatar Stock Exchange’s expansion plans, and incentives from exchanges like Saudi Exchange, ADX, and DFM to support the trend further.
Add the privatisation efforts, which will bring non-state-owned entities and family businesses to the listings landscape. International investors are increasingly being drawn to the Gulf stock markets and the latter opening up their economies as part of their diversification efforts are creating a ‘Feel Good’ scenario among the financial communities.
Factors like optimistic investor sentiment, evolving market trends, innovations and growing international interest shaping the landscape are now fuelling the ‘Gulf Growth Story’ and expect the trend to accelerate further.
Muhammad Hassan, capital markets leader at PwC Middle East, said, “Q1 2022 and Q1 2023 are by far the best performing quarters by IPO proceeds which the GCC has ever experienced up until now.”
Zahir Sabur, senior associate of Global Corporate at Reed Smith, told the Gulf Business that the reforms being implemented in the UAE have had the desired effect of increasing not only the number of listings on both the Dubai Financial Markets (DFM) and Abu Dhabi Securities Exchange (ADX) but have also raised the markets’ international profile.
“The net result is that not only has liquidity improved and domestic institutions actively pursued IPOs, but a number of our international clients are now becoming increasingly interested in a dual-listing of their securities on a UAE exchange to complement their main listing on the New York Stock Exchange, London Stock Exchange or other international markets,” said Sabur.
The GCC’s weight in the ‘MSCI Emerging Markets Index’ has increased from 1.6% in 2016 to 7.7% in 2022, driven by capital markets reforms.
“Saudi Arabia is a key driving force with so much investment taking place, but we are also seeing encouraging signs of additional capital markets activity in other parts of the region,” says Gregory Hughes, EY MENA IPO and Transaction Diligence leader, as the GCC region remains resilient to risks like high oil prices and geopolitical tensions, with investor inflows and strong share sales’ demand boosting the IPO boom further.
While the global capital markets are seeing diminishing stock activities, their Gulf peers have been strongly resilient in 2023, with IPO being one of the major growth engines. Investors in the region are now reportedly considering the shares of well-known companies (including state-backed) as an excellent way to diversify their investments from real estate and bank deposits.
In June 2023, ADNOC Group’s maritime logistics unit soared over 50% on its trading debut in Abu Dhabi after the state-backed oil giant’s $769 million IPO drew overwhelming investor demand, with $125 billion in overall orders.
Zahir Sabur stated that certain listings on Gulf markets appeared to have been undervalued by the bookrunners and often IPOs had been oversubscribed, all of which indicates real-time market confidence.
“ADNOC L&S listing is the latest in a string of IPOs that ADNOC has carried out over the years as state-backed entities are stepping up efforts to boost domestic equity markets while helping governments to diversify their economies away from reliance on oil revenues. The energy group raised $2.5 billion from the listing of its gas business, ADNOC Gas, in March. The deal stood out for the region with the highest proceeds globally for the first quarter of the year. Abu Dhabi is set to welcome eight more listings in 2023 after ADNOC pulled off the world’s biggest listing so far in 2023,” stated Gulf Business.
“Similarly, Al Ansari Financial Services’ offering on the DFM, the emirate’s first in 2023, demonstrated the continued appetite for GCC IPOs at a time when recession concerns, inflation and high-interest rates have damped investor sentiment in the global market. Al Ansari sold 750 million shares in the offering, equivalent to 10% of the company’s paid-up capital, to raise $210 million,” it remarked further.
PwC sees the UAE market remaining active and accounting for over 90% of the GCC IPO proceeds from two IPOs in the 2023 first quarter while Saudi Arabia dominated in terms of volume.
“Whilst historically there may have been a view that the Gulf region was not a mature economic jurisdiction, the past few years of positive growth and returns on regionally-listed securities has led to more institutional money finding its way to the GCC,” Sabur asserted.
As the GCC is poised to continue to generate interest for its strong, distinctive businesses and family office listings, expect a flourishing future for the IPOs.
We have Qatar, whose $275 million market-maker programme is being implemented across the Gulf region to support entities on their path to IPO. The initiative will run till 2028, as the country’s wealth fund is now offering an economic incentive by way of a rebate to lower trading costs for market makers.
Qatar Stock Exchange is now working to increase listings and introduce more exchange-traded funds and derivatives. The Qatar Stock Exchange missed out on the IPO frenzy in the Gulf, but expects the country to play a nice catch-up game in the coming days.