The Middle East is on the ‘radar’ of global investors as it enjoys an IPO boom

Shares in data analytics company Presight AI soared on Monday in the first day of trading on the Abu Dhabi Stock Exchange after a $496 million initial public offering that was oversubscribed 136 times.

The demand is not one-time. It comes two weeks after Adnoc Gas raised $2.5 billion on the emirate’s biggest bourse. They are among the latest in a fast-flowing supply from the Middle East, which stands in stark contrast to Europe’s moribund market.

Last year’s 51 IPOs in the Middle East and North Africa were a record, according to EY. They raised $22 billion, up 179 percent from 2021, the consultancy said, adding that this year’s market looked “healthy.”

Miguel Azevedo, president of Citigroup’s investment banking business in the Middle East and Africa, said the region was “on the radar screen”.

“A lot of people moved here post-Covid and there were a lot of IPOs here, so it forced the world to look at the region, which grabbed attention when nothing was happening in the rest of the world,” he said.

Bar chart of listings in the Middle East and North Africa (quarterly total) showing that the Middle East is booming with IPOs

Financial regulatory reform, accelerated privatization amid political stability, and oil and gas prices, which have risen significantly from their lows due to the Covid-19 epidemic, are driving both the IPO frenzy and private deals, bankers said.

“The ongoing turmoil has subsided and oil prices are above breakeven [for governments]” said Sammy Kayello, senior advisor at Morgan Stanley.

Saudi Arabia is transforming its oil-reliant economy under the leadership of its ambitious Crown Prince Mohammed bin Salman. The UAE has attracted financial firms to its commercial hub in Dubai and launched a dizzying number of stock exchanges in the oil-rich capital, Abu Dhabi. Tiny Qatar, buzzing with the success of the World Cup, will double its gas exports.

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According to data from the Global Private Capital Association, private equity fund managers invested $19.8 billion in 191 deals in the Middle East last year, the only place in the world where the value of investment increased year-on-year in 2022. In 2018, they invested $600 million.

The combination of regulatory reform and high oil prices was most acutely felt on the Saudi stock market, with the standout deal being oil supermajor Saudi Aramco’s $29 billion IPO in 2019.

This started the upswing in IPOs, and 2022 will be a record year. In the last five years, the market capitalization has increased by about 475 percent. According to the market regulatory authority, there are currently 269 listed companies, compared to 188 at the end of 2017, and another 80 are preparing to enter the market.

In Abu Dhabi, the national oil company floated a series of assets, fueling a similar surge in listings.

Americana, the fast-food chain owned by Saudi Arabia’s sovereign wealth fund and Dubai-based businessman Mohamed Alabbar, listed on both the Abu Dhabi and Riyadh stock exchanges in December amid growing demand.

“It’s the same playbook from Europe – in the UK it’s the mid-to-late 1980s when privatization spurred activity,” said a senior US capital markets banker. “It helped stimulate the markets and foster an equity culture and encouraged private companies to go public.”

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Dubai’s successful handling of the pandemic has attracted crypto-billionaires and financial executives who have taken advantage of the open economy. Many have put down roots and persuaded their companies to follow suit.

Hedge funds and asset managers, including Brevan Howard and ExodusPoint, have created the city’s financial district, which is currently in talks to allow 50 more hedge funds to bask in the tax-free sunshine and advantageous trading window across Asia and the US.

“The international investors are coming – large, mature and established long-only asset managers in the US and Europe who are investing with their own people to prepare to invest more in the world. [the Gulf]” said another American investment banker.

Dubai, after its neighbors’ capital markets went into overdrive, launched its own privatization campaign last year, pledging to list 10 state-linked entities. Four are already on the list, including utility company Dewa and toll company Salik.

Azevedo said the region was entering the “second phase” of listing, with “NGOs going public in both the UAE, Dubai and Abu Dhabi.” “This year, some family-owned companies are also coming in,” he added.

Family-owned businesses make up 90 percent of the private sector in countries such as Saudi Arabia and the United Arab Emirates. As founders die, their heirs often fall into recriminations. Going public is a means of imposing corporate governance and succession planning agreements to avoid family feuds.

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Al Ansari Financial Services, the family-owned company and the largest exchange chain in the United Arab Emirates, raised $210 million on Monday amid strong demand on the Dubai Stock Exchange. Other regional family-owned groups mature enough to float shares include Dubai-based Majid Al Futtaim malls, Lebanese-owned retailer Azadea and Abu Dhabi hypermarket chain Lulu.

Azevedo predicted that these would be followed by a third wave of “young fintech companies and tech-capable companies raising money in the private equity market.”

Potential candidates include ag-tech firm Pure Harvest, cloud kitchen platform Kitopi and classifieds firm Dubizzle, bankers say.

Recent banking collapses in the United States and Europe are reviving fears of a repeat of the global financial crisis, when the Middle East prospered while the rest of the world went into financial meltdown.

At the time, the Gulf boasted that it had “decoupled” from the world economy before crashing into its 2009 debt and oil crisis.

“It’s a little bit different now because of the stronger balance sheets and the ongoing restructuring programs,” said Tarek Fadlallah, CEO of Nomura Asset Management in the Middle East. “During the GFC, oil prices fell sharply and the big difference this time is that prices are staying within the comfort zone.”