Saudi Arabia and the United Arab Emirates are leading frenzied activity in Gulf equity capital markets.
A spate of initial public offerings (IPOs) among the Gulf Cooperation Council (GCC) countries has attracted international investors seeking refuge from global markets battered by Russia’s invasion of Ukraine. Global investors have also been tempted by the promise of fat dividends, as governments offload stakes in major companies to boost local bourses and lock in gains from a spike in oil prices.
During the first half of this year, GCC issuers raised nearly $11.3 billion through 19 IPOs. That contrasts with just two IPOs in the same period last year, with a total value of $281 million, according to Refinitiv.
Dubai’s zeal for headline-grabbing deals saw it sell a 6.5% stake in the Dubai Electricity and Water Authority, for example, raising close to $6.1 billion in the UAE’s largest-ever IPO and the biggest listing in the Middle East since Saudi Arabia sold a stake in Aramco in 2019. The April listing on the Dubai Financial Market (DFM) was 37 times oversubscribed; and it attracted more than 65,000 local and international investors, reportedly including investment firms BlackRock and Vanguard. Shares surged 20% on the first day of trading.
With mounting pressure on GCC governments to embrace net-zero goals, investors have awoken to the fact that years of underinvestment in oil and gas infrastructure could provoke an energy crisis. Their interest has been piqued not by altruistic concerns but by the realization that GCC governments alone will not be able to finance the massive infrastructure investment required—even with oil prices at $120 a barrel.
The potential impact of underinvestment has led some analysts to predict that further delays may cause oil prices to surge yet again. A December report by the International Energy Forum and IHS Markit estimates that “oil and gas upstream investment will need to increase and be sustained at near pre-Covid levels of $525 billion [per year] through 2030 to ensure market balance.”
That is despite diverging opinion on long-term demand forecasts and the reluctance of some investors to support carbon-centric businesses amid environmental, social and governance concerns. “Upstream investment in the oil and gas sector in 2021 was depressed for a second consecutive year at $341 billion—nearly 25% below 2019 levels,” the report adds. But “oil and gas demand is now near pre-pandemic highs and will continue to rise for the next several years.”
This suggests that IPOs in the GCC are set to continue at a breakneck pace not only as a way to tap international investors, but also as a channel to diversify the energy-dependent Gulf economies.
It’s about transparency too. “The goal is to show their economic performance and accountability to the business world,” says Jonathan Howell-Jones, a change consultant based in the United Arab Emirates (UAE).
Yet it’s more than oil and gas. The GCC governments have a large footprint throughout their economies through state-owned and government-related entities that straddle various sectors, including utilities, transport, logistics, banking and real estate.
GCC IPO Jamboree
Dubai, the UAE’s business hub, announced plans in November to take 10 government-linked companies public to boost stock market activity. There is increased speculation that Dubai’s plans could include Emirates Group—perhaps both the airline and the group’s Dnata airline-services subsidiary—in what analysts predict will be a blockbuster listing. Airport retail operator Dubai Duty Free, with approximately $976 million in sales in 2021, has also been tipped as an IPO candidate.
The emirate plans to establish a market-maker fund of 2 billion Emirati dirhams (around $545 million) to support listings and promote secondary trading. International investors seeking exposure to the GCC markets on an equal footing with other developed financial markets have long criticized the lack of depth in its debt markets.
The Emirate of Abu Dhabi is pursuing a similar strategy. It recently sold a 10% stake in Borouge, a petrochemical joint venture between the Abu Dhabi National Oil Company (Adnoc) and Austrian chemical company Borealis. The IPO, 42 times oversubscribed, raised just over $2 billion and began trading on the previously lackluster Abu Dhabi Securities Exchange (ADX) in June. State-owned Adnoc has listed some related companies, including its drilling and distribution businesses, as well as a fertilizer joint venture.
Both the DFM and the ADX have held roadshows in major financial centers to drum up interest in future listings and garner portfolio investment. The ADX says its market capitalization jumped 25% in the past year to $545 billion at the start of June, while the DFM’s capitalization is approximately $149 billion according to the World Federation of Exchanges.
Nasdaq Dubai launched a new exchange in 2020 to boost listings of small and midsize enterprises; but it has failed to attract major new listings. In 2020 Dubai’s port-operator DP World de-listed from the exchange before returning to private ownership.
Meanwhile, Saudi Arabia—home of the GCC’s largest stock market—is witnessing a surge in IPOs. This could lead to a dramatic increase in listings on the Tadawul and Nomu bourses and the possible return of Aramco to the market.
“The Saudi market is expected to see about 50 listings in 2022 and 2023 [compared with] 20 listings in 2021,” according to Anish Ailawadi, global head of investment banking at Acuity Knowledge Partners.
In March, Nahdi Medical raised about $1.4 billion—the kingdom’s largest flotation so far this year—on the Tadawul exchange. Nomu, a newer alternative exchange with lighter listing requirements that serves as an alternative platform for companies to go public, increases the rivalry between Saudi Arabia and the UAE and may force the latter to make further concessions to stay ahead in the race to attract foreign investment and regional listings.
But size matters, analysts say. Saudi Arabia’s Tadawul, its main bourse, with a market capitalization of around 12 trillion Saudi riyals (a little under $3.3 trillion) according to its website, is more than four times the size of competing UAE stock markets combined. Concerns over liquidity have led to calls for UAE authorities to merge the Dubai and Abu Dhabi bourses. But with Abu Dhabi seeing renewed investor interest and the probability of further listings of prized energy assets, that outcome seems unlikely.
Still A Family Affair
Many recent GCC IPOs have been government-related entities, though Saudi Arabia is seeing an increasing number of family-owned companies seeking to list. Historically, family businesses in the GCC have been reluctant to follow government calls to list on local exchanges. “Family-owned companies are still hesitant,” notes Acuity’s Ailawadi, citing a study by Deloitte that shows only 8% of family businesses in the region are ready to go public. “The fact that they are expected to announce every action that might impact the share price seems a bit overwhelming to them.” Families also remain wary of losing company control.
Still, to be competitive among emerging markets, GCC governments will need deeper capital markets; and that will necessitate increasing the presence of family businesses compliant with international standards of governance and transparency. Mohamed Fahmi, co-head of EFG Hermes Investment Banking, says new regulations will make the environment more appealing, so the situation “is likely to change as issuers see momentum build on the back of numerous successful offerings.”
It is also about optics. In the UAE, authorities have pledged to clean up following a decision in March by the Paris-based Financial Action Task Force placing the UAE on its list of jurisdictions under increased monitoring—more widely known as the Grey List. The impact on the UAE’s ambitious IPO plans might be significant, a 2021 IMF study warns: “Capital inflows decline on average by 7.6% of GDP when a country is greylisted.” Foreign direct investment and portfolio investments also decline on average by around 3% of GDP, the IMF asserts. Alongside the UAE’s dash to improve controls, it is grappling with an influx of wealthy Russians amid fears that funds of some sanctioned oligarchs could seep into local markets.
Gulf economies may or may not hold investsment appeal when energy prices fall, and the performance of the latest listings will influence international appetite for its IPOs. For the moment, the GCC seems an oasis among emerging markets.