Middle East IPO boom shines in Western twilight

It has been another discouraging exercise for global IPOs, but the Middle East has shone as a hub of startup activity that is expected to extend until 2024. Over the past two years, the energy-rich region has emerged as a very busy IPO market, as area governments, seeking to reduce their economies’ dependence on oil, have sold stakes in state-owned companies.

Russia’s exclusion from MSCI’s Emerging Markets index after its invasion of Ukraine last year, and slowing economic growth in China, have led investors to turn their gaze to the Persian Gulf. Although listings in the region have raised less than half the amount of last year, $10.5 billion is still expected to be the third-best year since 2007 for IPO proceeds, according to data compiled by Bloomberg.

The Gulf accounts for about 45% of total IPO volume in Europe, the Middle East and Africa (EMEA region) this year, compared to 51% in 2022. Bankers do not expect the flow of IPOs in the Middle East and North Africa declines in the near term as tailwinds from strong growth, government reforms and investor demand remain. “The outlook is very strong for IPOs in EMEA in 2024,” explained Christian Cabanne, head of equity capital markets at Bank of America for Central and Eastern Europe, the Middle East and Africa. “Perhaps the difference between 2023 and 2024 is that in 2024 we expect to see more private companies entering the market, including in the UAE,” he adds.

Among the companies planning to list next year are Saudi low-cost robe Flynas, which has hired banks for its potential bid, supermarket chain Spinneys Dubai LLC and Al Fakher shisha brand owner Advanced Inhalation Rituals. According to Bloomberg News. Startups such as e-commerce company Floward and buy now, pay later company Tabby are also considering listing.

Last year, the collection from public offerings for the sale of shares in the Middle East was almost 23 billion dollars and in 2019 it was 31.2 billion, mainly due to the record offer of 29.4 billion from the oil company Saudi Aramco, which was virtually in the largest listed company after its debut.

The region’s strong performance contrasts sharply with many other major IPO markets, from the United States to Europe and China. Globally, first-time stock sales are on track to have their worst year since 2009, with many major listings having lackluster trading debuts, such as German sandal maker Birkenstock Holding Plc.

It’s a completely different story in the Middle East. The average gain for IPOs that raise at least $100 million has been nearly 40%, and only one company is operating in the red, Investcorp Capital Plc. The alternative investment firm has fallen 13% below its offering price after price stabilization ended a month after its debut.

The region’s strong IPO performance will likely continue to attract investors, especially as many deals offer attractive dividend yields and provide exposure to previously underrepresented sectors. “Investors are very keen to get into these new sectors that are suddenly available in the market,” says Rami Sidani, head of EMEA portfolio management and frontier investments at Schroders Investment Management. “So there is a huge appetite, and the IPOs are relatively well priced.”

Conflict in Gaza

To be sure, not everything has been smooth sailing for the region’s markets. The outbreak of war between Israel and Hamas in Gaza in early October caused a 3.2% drop for the MSCI GCC Countries Index as investors feared the conflict would spread. The index has since recovered 12% as those concerns eased.

“The market is still in good shape and has not been affected by the conflict and things could remain quite subdued,” said Salah Shamma, head of equity investing for the Middle East and North Africa at Dubai-based Franklin Templeton. “However, if things get worse and if the theater of military operations expands, then that could definitely have a detrimental effect on risk and how investors view the region.”

Another risk to the IPO boom in the Persian Gulf could be a weakening performance on share sales, which have effectively come to be seen as a sure way to make money, especially from government-backed companies. . .

“If there is a risk, it is post-placement performance,” warns Andrew Briscoe, head of EMEA ECM syndicates at Bank of America. ‘The incentives between sellers, businesses, institutional buyers and local retailers have aligned. As the flow of IPOs shifts toward privately held assets, it will be key to see this alignment of incentives maintained.’”