Gulf rising - IPO investors flock east to ride local privatisation wave

Data InsightECM Pulse 8 June

Gulf rising - IPO investors flock east to ride local privatisation wave

Middle East IPOs have had a historic start to 2022, as local governments press on with a wave of privatisations that is attracting an increasingly international investor crowd.

The USD 12.4bn worth of IPO paper issued year-to-date in MENA (Middle East & North Africa) is by far the best start to a year for the region ever, overwhelmingly dominated by Middle East gulf state deals. This year to date is already the second-best full year ever for MENA IPO issuance, according to Dealogic data. Only 2019 trumps the current tally, thanks to the USD 29.4bn IPO of Saudi Aramco.

Bankers had told the ECM Pulse they expected a good vintage but have been surprised by the level of international investor interest. International buysiders still get fewer shares than locals, but sources say their levels of demand and allocation are rapidly increasing.

Last week Borouge [ADX:Borouge], a plastics joint venture between state-owned Abu Dhabi National Oil Company (ADNOC) and Austrian chemicals firm Borealis, wrapped up a USD 2bn flotation on the ADX. The transaction was 42 times oversubscribed, with a large portion of that being from international accounts.

Markets opening

Bankers working on recent deals, including the April USD 6.1bn IPO of Dubai Electricity & Water Authority (DEWA) [DFM:DEWA], highlight the extraordinary growth of international investor demand.

“It is a proper bull market,” said one senior EMEA ECM banker who equated the level of international interest in ME IPOs in 2022 to that seen in European IPOs at the beginning of 2021, one of the best issuance windows in recent ECM history for the continent.

Another banker called the Middle East “the only truly functioning IPO market in the world at the moment”.

“There is growing momentum among governments in the region to take their state enterprises public, as Gulf countries, and the UAE in particular, seek to diversify their economies away from oil,” said Antoine Abou Mansour - Middle East Deals Leader at PwC.

Regional capital markets are opening, governments are pursuing the right reforms and the speed of these initiatives makes it a very attractive market, said an investor who had visited the region four times already in 2022.

One source close to the Borouge deal added that several private equity and hedge fund investors have been setting up shop in Dubai in recent years, such as Millennium Management, to partake in local deals.

The first banker added that his firm had a pipeline of Middle Eastern deals set to come, with many involving an element of state sell-downs, like DEWA and Borouge.

This news service reported last week that Tecom, a real estate investment holding affiliate of state-owned Dubai Holding, is expected to launch its IPO before summer. The privatisation of Dubai’s road-toll operator Salik could follow in September. In Abu Dhabi, state-owned sovereign wealth fund Mubadala Investment Co is lining up an IPO of Emirates Global Aluminium although this could be a 2023 deal, sources have told this news service.

Outside of the UAE, there are other large privatisations reportedly being prepared, including two divisions of Saudi Aramco [TADAWUL: 2222] – the company’s trading arm Aramco Trading Company and the refinery Luberef. 

Outsized returns

Unlike much of the global market, Middle Eastern stocks have yielded sustained returns in recent months.

The MSCI GCC countries index is up over 14% year-to-date and over 30% in the last 12 months, massively outperforming the MSCI All-Cap-World Index which is almost 13% down year-to-date.

Middle Eastern IPOs have also been stellar performers when compared with the rest of EMEA. MENA IPOs in 2021 and 2022 have produced a weighted return of around 32% from offer price to current trading, according to Dealogic data, against a -8.2% weighted return for all EMEA IPOs. Excluding MENA IPOs, EMEA deal performance drops to a loss of more than 14%.

Outperformance has been attributed to local investor demand in the aftermarket but also to the state sellers’ lack of price sensitivity. Their goal is to take an asset public with a focus on aftermarket performance given the state tends to hold on to majority stakes.

Many investors had also begun the year underweight on the region, including emerging market funds that were overweight on Russia and have had to exit those positions following the invasion of Ukraine, said the second banker. IPOs are an efficient way to gain stock quickly for that re-weighting.

However, Middle Eastern IPOs are not immune to global volatility. The first source close to the IPO of Borouge said that ADNOC decided to be conservative on valuation after a bad week for global markets, as well as the death of Sheikh Khalifa, president of the UAE on May 13, which caused the FTSE ADX General to fall 5%.

The brief drop affected several UAE stocks and caused DEWA, which trades in Dubai, which priced a USD 6bn IPO earlier this year, to fall briefly below the IPO price.

Deal flow could slow down in the region, said a local institutional investor, given the fast-changing conditions in money markets as interest rates and inflation rise. Most regional IPO stories depend on growth and some companies might wait for economic recovery before listing.

For now, however, it remains IPO investors’ preferred destination.

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