Initial public offering (IPO) activity is expected to pick up this year as valuations improve and companies continue to struggle to obtain finance from traditional sources such as banks. Attracting more institutional investors to regional markets also could encourage firms to consider a public listing, say analysts.
"We expect to see activity by the end of this quarter or early in the second quarter," said Ahmed Wahdan, the head of equity capital markets for the investment banking group at National Bank of Abu Dhabi (NBAD). Reduced valuations and market volatility deterred new offerings across the Gulf during the global financial crisis. In the GCC, only Saudi Arabia and Qatar saw IPOs launched last year, Ernst & Young reported. Across the Middle East, initial issues last year raised US$2.06 billion (Dh7.56bn), down from $12.46bn the previous year.
It has been 11 months since the last IPO in the UAE, when the contractor services company Drake and Scull floated shares on the Dubai Financial Market in March to help fund its regional expansion. With as many as 114 offerings of stock already announced in the Middle East, analysts expect activity to resume once regional markets show increased stability. While greater stability is expected to be a draw for companies considering an IPO, other factors may mean they seek a listing sooner. Funding from traditional sources has dried up. With banks continuing to restrict lending after the credit crunch, corporate borrowing remains in the doldrums.
"The principal reason why it [IPO activity] would be sooner rather than later is bank lending to medium and large businesses has declined," said Gerhard Hametner, the director at MAC Capital, the investment bank. He sees IPOs as part of a wider surge of interest in the region in public capital markets, including corporate bonds and sukuk. "We see quite a revolution taking place for capital markets in the region and this will be good in the long term as the market broadens and deepens," he said.
Worries about the impact of Dubai World's debt restructuring talks have weighed heavily on local share markets since the end of last year. The Dubai stock benchmark has fallen 7.8 per cent this year, while its Abu Dhabi counterpart has retreated about 1.4 per cent. Despite the declines, funds managers remain confident about the fundamentals of companies and are gearing up to broaden their base to include more institutional investors, said a survey by Standard & Poor's that was published last week. Mr Wahdan sees other benefits. "Once there's more institutional investors, there will be more stability and that would provide more attraction to companies considering launching."
An extra layer of sophistication could be added to future initial offerings, with the process of book-building expected to play an increasing role. Traditionally, IPOs in the UAE have been priced at Dh1 (27 US cents) a share. With the price often bearing little relation to demand, sales are usually oversubscribed. Book-building would allow companies to offer a price range to test investors' appetite and fix the IPO price at a later stage to reflect actual demand.
"There will be more intermediation by investment banks so we might be more involved with valuations and new activity on book-building, which will help with tapping into market demand for new offerings, specifically from institutional investors," said Mr Wahdan. Analysts expect investor appetite for new listings from firms operating in fields such as infrastructure, industry, retail and tourism. "The market needs fresh blood with diversity across new sectors where investors would be keen to invest," said Fadi al Said, the head of equities, at ING Investment Management Middle East.