Regional financial markets have shown their correlation in responding favorably to private equity firms and the efficiency they provide to businesses over a diverse range of sectors. Many firms claim to either be industrially- or geographically-agnostic or pride themselves in their ability to be opportunistic while other firms pride themselves in a specific expertise with one industry or geographic region.
One way to understand the positive market reaction to private equity deals, which are still relatively nascent in the region, is to watch the jump of initial public offerings (IPOs) and the prices at which they are subscribed. IPOs present a way for firms to recapitalize and use their funds to expand or improve operations. Private equity is the key to bringing a firm up to scratch before it launches an IPO.
Looking at the figures, one can notice the jump in IPOs in the region. According to data from Zawya Investor, the total value of IPOs in the Middle East and North Africa (MENA) region, for 2007, reached $14.45 billion, a year-on-year increase of 77%. Among the most attractive markets which played host to these IPOs are Saudi Arabia, which attracted one third of all 66 IPOs in the MENA region, followed by Jordan with 14 in total, and Morocco, whose market hosted 10 of the listings.
To further break it down by industry, financial services comprised 52% of the IPOs, with real estate ranking second with 11%. According to Zawya Investor, there are over 100 deals in the pipeline, including the second largest public offering in the Gulf, by Saudi Arabia’s Al-Inmaa Bank, for $2.8 billion, as well as Zain Saudi Arabia, which plans to exit the markets and attract $1.86 billion, the third telecom operator to offer the Saudi public its shares. The records set will not stay for long, with Saudi Arabian Mining Company, planning an IPO of up to $9.26 billion.
The type of business going the IPO route is identified as a firm with room for lots of improvement, but that has made a good start. When a private equity company comes in and buys such a firm, after a restructuring period where the management and the board is reflective of a new business philosophy and strategy, the firm is put on a publicly-traded exchange in the form of an IPO. Izzet Güney, managing partner at Millennium Private Equity, believes that IPOs “represent an important exit avenue for the private equity industry alongside the trade sale.”
Wadah Al-Taha, head of strategies at Emaar Financial Services, explained that “IPOs are quite important now. We have a limited depth in all markets, except Egypt, in the region. The companies are limited, if you keep liquidity pressure coming, then it will affect the limited number of stocks. A lot of people will then lose, especially the small investors.” Al-Taha is “expecting the trading volume of 2008 to exceed $850 billion because of liquidity. So far, since the beginning of the year, UAE markets have traded $120 billion, equal to 22% of the total amount traded last year.”
Al-Taha believes this is a good justification for more IPOs, indicating that “more depth, more diversification into the market is what we need.” Looking forward, Al-Taha said that “in the UAE we will witness 14 new IPOs. In Dubai’s financial sector at least one or two bank IPOs are planned. One with a privatized institution called Emirates Post, which is highly anticipated. We also have a possible IPO in jewelry from Damas, a family-run firm.”
Another prospect for Al-Taha is the, Saudi-based, National Oil Company which “is the fastest-growing oil service company in the world. It is highly attractive and worth more than $1 billon and is going public in Dubai. An Arab telecom firm specializing in satellite communication is also due for an IPO. The education sector will also be opened in Abu Dhabi.”
IPO figures can be one explanation for the number of shares trading in local markets, as well as general economic exuberance. However, the figures presented represent a burgeoning market flooded with activity, with room for more. According to figures from the National Bank of Abu Dhabi, the total share traded in local markets by sector from 2000 to 2007 showed a jump from $1.38 billion in 2000 to $554.5 billion in December 2007, an astounding average year-on-year growth and telling of the liquidity available from the most recent boom in the petroleum industry thanks to rising global prices, which brought about a spike in 2004 trading levels, which have yet to calm down.
2007 most important exits
Oversubscription
Pundits point to IPO oversubscription as a source of concern for financial markets, but others are less worried. Güney believes “the term oversubscription has been misused a lot. Usually you have a share price range on offer, so let’s say you have a range between $1 and $2 and you go out and try to do the book building process where you call institutional investors and ask ‘are you interested in shares of ABC? Yes. How much do you want to buy?’ They say ‘OK, I’ll spend $100 million at $1. If you sell it to me at $2, then I will only have $50 million for you.’ The $100 million is the number that everyone remembers.”
Güney points to failings in analysis when industry watchers point to oversubscriptions, believing that instead of simply stating an IPO was oversubscribed, the price at which the IPO was exited is important when examining IPO subscription, since “it could have been oversubscribed ten times at $1, but at $2 maybe not oversubscribed whatsoever. Oversubscription is always a matter of excess liquidity and price point.”
Khaled al-Muhairy, CEO of Evolvence Capital, said that he believes, “there are so many reasons in terms of governance laws, minority protection, so many factors, but I think they really don’t know what to do with these companies. They say ‘OK, we are going to buy these mobiles at six and exit them at nine’. Exit them where? DIFC? The UAE’s Minister of Economy Sheikha Lubna has 150 applications pending on her table that she doesn’t want to do. She doesn’t want to overrun the market with a higher flow of IPOs. So people do not realize a very simple equation in private equity, cash in, cash out.”
Understanding private equity as an asset class was the final macroeconomic factor to determine private equity’s future in the region according to Güney. “Today, not many investors in the GCC understand private equity as a unique class of alternative assets, and one that is often uncorrelated with stock market performance. The investors that do understand this used private equity investments to great effect in 2006, when the stock markets in the GCC had ended the year on a sour note, but these investors mitigated their losses because of gains on their private equity portfolios. This awareness is growing, and as it does grow further, I expect private equity will come into its own as an established asset class in the region.”
