The Middle East’s regional IPO markets are flourishing despite a global slowdown and geopolitical instability owing to the region’s long-term structural and regulatory reforms, a maturing diversified market and strong investor confidence.
Despite a global slowdown in public issuances, the Middle East and North Africa (MENA) region has remained an oasis for capital market growth owing to healthy investor confidence, maturing markets, dynamic regulatory reforms, and strong post-issuance returns.
According to an EY IPO report, MENA markets saw 48 initial public offerings (IPOs) in 2023, raising $10.7 billion in total. Q4 of 2023 itself saw 19 IPOs raise $4.9 billion in proceeds.
While this was a 6 percent decrease in value and a drop of 51 percent in size compared to 2022, this was primarily attributed to the global slowdown of markets as well as the absence of particularly large-scale IPOs that had previously energised the market in 2022—namely, Americana Restaurants International, Saudi Aramco Base Oil Company, and Arabian Drilling Company.
The 2024 pipeline includes 29 companies across various sectors that have announced their intention to list, with the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) leading the way in terms of expected volumes.
KSA dominated Gulf IPO activity in the last quarter of 2023, with 14 of the 19 listings in Q4 2023 taking place on the country’s two stock exchanges – the Tadawul main market and the parallel Nomu market.
The first quarter of 2024 has seen some IPO activity in the region, although lower than anticipated. The London Stock Exchange Group reported that MENA equity capital markets raised $1.2 billion in equity and equity-related issuances in Q1 2024, down 6 percent year-on-year and the lowest first-quarter total since 2021.
STRONG INVESTOR CONFIDENCE
Salman Al-Sudairi, who leads the Saudi Arabia practice at the international law firm Latham & Watkins and also serves as the managing partner for the MENA region, views the recent market downturn as a short-lived issue, noting that the market's underlying strength and growing investor interest in IPOs signal a resilient economic landscape poised for recover.
“The global slowdown may have had a slight impact on the number of issuances, but there is a huge pipeline of potential issuances coming in across the Saudi and UAE markets”, says Al-Sudairi.
“We as a law firm are getting requests for proposals (RFPs) on a weekly basis, and it’s the same with investment banks with an unprecedented amount of interest from foreign investors looking to invest in the region,” he adds.
This strong investor confidence is attributable to three significant changes over the last few years: the government-driven increase in access to the region’s businesses, the maturity of local investors and companies, and structural regulatory reforms to increase transparency and accountability in capital markets.
Almost two decades of reforms, including investor protection regulations, transparency requirements, risk mitigation policies and the creation of market intermediaries, has facilitated the inclusion of exchanges in the region on global financial indexes, are driving forward a larger cohort of companies, across sectors, to list on the region’s stock exchanges.
In recent times, it has been Saudi Arabia’s structural market reforms that have led to increased IPO activity in the country. At the macro level, the country has put out new company laws, bankruptcy regime and contract laws to improve business certainty.
The most significant reform has been the lifting of foreign ownership limits from 20 percent to a full 100 percent, under Saudi Arabia’s Vision 2030. This shift has ensured that Saudi Arabia's companies are now open to the world’s investors.
The modernisation of the country’s securities dispute resolution mechanism, led by the Committee for Resolution of Securities Disputes (CRSD), has also chipped away at concerns related to investment risks.
“As the market has grown, we are seeing better and quicker decision-making from the CRSD, which is giving more comfort to market participants,” Al-Sudairi explains.
Regulatory authorities have also improved their engagement with listing companies and investors, particularly on issues of corporate governance, oversight and accountability, which gives more confidence to investors looking to pour into the country’s capital markets.
Investors are also attracted to strong returns and aftermarket performance of publicly listed companies in the last few years.
A PwC report found that Middle East IPOs have had a much better IPO aftermarket performance compared to the rest of the globe. In 2023, two of the top ten IPOs, Ades Holding and Pure Health Holding, increased by over 70 percent since their listing.
The Middle East is also experiencing the emergence of a start-up market, with a larger number of unicorns and smaller companies, particularly in the technology sector, that are now maturing and looking to go public.
This maturing market demands specific regulation to bring in foreign investors and public capital, and the governments in the region are legislating tailor-made solutions to address these concerns.
“There's a recognition that these are important companies looking to go public, and the barometers are a little bit different,” explains Al-Sudairi.
This is changing the market dynamic as the focus is no longer on state-owned enterprises looking to go public. “You've also got these high growth, high potential companies that are coming into the market that have a different investor base that have a different level of excitement,” he adds.
STABILITY AMID INSTABILITY
This investor confidence remains strong, particularly in Saudi Arabia and the UAE, despite the region’s geopolitical instability and growing tensions between Israel and Iran. A Fitch Ratings report from January finds that the Israel-Hamas conflict is dampening market outlook, presenting risks to tourism, trade, investment and public finances.
But the negative spillover is broadly limited to neighbouring countries such as Egypt, Lebanon and Jordan, the report finds. The more long-term threat to the region’s bourses could be the volatility of oil prices amid the conflict, given the strong dependence of Gulf Cooperation Council (GCC) nations on the oil economy.
But the GCC has done a good job in balancing geopolitical sentiments with economic growth, says Al-Sudairi.
“The conversation around escalating tensions is there, but in Saudi, UAE, Kuwait, we don’t feel any direct tension emanating in terms of business growth,” Al-Sudairi explains.
The active diversification from oil is also a significant comfort factor, bringing stability to investors and local businesses alike.
In 2023, Saudi Arabia’s IPOs came from a variety of sectors, led by energy (36 percent), transportation (29 percent) and healthcare (10 percent), an EY report found. But Al-Sudairi says that he is increasingly seeing growth from companies from other emerging sectors, particularly financial technology, who are expressing interest in going public and attracting foreign investment.
“While energy, construction and infrastructure remain hugely important components of the public markets and will remain so, at the same time, there has been strong growth in the consumer market, residential development and digital sectors.”
- Salman Al-Sudairi, Latham & Watkins
Investment banks in the region’s IPO scene are also more actively looking at non-oil investments to lead growth over the coming decade and forecast an increasing participation from a non-oil private sector to hold a substantial chunk of the country’s public markets in that timeframe.
“While energy, construction and infrastructure remain hugely important components of the public markets and will remain so, at the same time, there has been strong growth in the consumer market, residential development and digital sectors,” Al-Sudairi says.
