In the last two years, the liquidity in the GCC economies has improved substantially and the capital markets witnessed increased depths, both in terms of the number of listed companies as well as market capitalization. The corporates are witnessing good earnings momentum, which is likely to be sustained on the back of buoyant economy and tremendous business opportunities in the region. The year 2005 in particular was good for the GCC region as the countries witnessed strong fiscal positions due to high oil prices. The capital markets observed improved primary market activity, which increased the number of companies listed on the GCC stock exchanges from 492 at the end of 2004 to 579 in 2005.
The primary markets evoked special investors’ attention as the private businesses and the governments of the region tapped the primary market to unlock the value of their investments. This also improved the performance of the secondary markets in terms of increasing the trading activity especially by the retail investors. Out of all GCC markets, the UAE bourses witnessed the most oversubscriptions, led by Aabar Petroleum which was oversubscribed by a massive 800 times. Aldar Properties was also oversubscribed by 448 times and generated US$103bn in terms of funds committed. Among others, Arab International Logistics was oversubscribed by 80 times and Finance House witnessed a 75x oversubscription. This high level of oversubscriptions explains the elevated initial opening price and the subsequent performance of many of the newly listed stocks. According to the reports, the public share sale of Emirates Integrated Telecommunications Company (EITC), the Emirates’ second telecoms operator, was oversubscribed by 167 times.
However, with the strong oversubscription levels, have come out the report of strong bank financing which has taken the turn of abuse of the system by some investors and banks. Last year, the UAE central bank warned some banks for offering leverage far in excess of the permitted level 5 times. The central bank's circular had directed banks not to provide loans to investors greater than five times the investment made by the investor as there have been instances where a banks offered leverage in excess of 12 times.
In order to smoothen the functioning of the capital markets, the GCC region is witnessing a change in the regulatory framework with the supervisory institutions introducing new capital market laws to improve the investment climate in their respective countries e.g. Central Bank of UAE has decided to effect a 10 per cent rise in loan ceilings extended by banks against mortgages of corporate shares to 80 per cent of the market capitalization. However, in a major move, the UAE authorities are contemplating to fix a ceiling on the maximum allotment in IPO subscriptions. With the new rule that limits the maximum allotment expected to come into force, small and medium investors stand to gain.
Also, the IPO is required to be offered to the investor at par in Saudi & UAE and a minimum of 55% of paid in capital should be offered at the IPO in the UAE. There are reports that this is also being done away with in order to encourage promoters to retain the controlling interest even while going public. The regulators have also directed the newly established firms that have completed their IPOs to refund surplus within two weeks which will help the markets in getting back the liquidity. Besides the Saudi and Oman capital market regulators have tried to evoke interest of retail investor by introducing share split to make markets more liquid.
All these restrictive clauses in new IPO’s such as minimum allotment per application, allocation to all the applicant leaves limited upside potential especially to large investors which are genuinely interested long term investment rather than doing speculative trading activity on the bourses. Also current equities too are trading at high premiums due to limited number of listed securities currently available to investors and they command a liquidity and marketability premium from the investors.
For those investors who are concerned that they might not get a substantial chunk in the IPOs and have to buy stock at higher levels (post-listing), one route can be investing in the company prior to its offering. There are various private equity funds in the region that provide investors with investment opportunities into Pre-IPO deals and equity deals in which there is a reasonable probability of exit via a recognized stock exchange. The information about closed companies is also not available easily to the investors so they can invest in the pre-IPO or private equity funds who can conduct professional research, valuation and evaluation of management, due diligence on the companies, determining purchase/selling price and take decision on the timing of sale of their investments. Investing in the fund offers a wider selection on companies and markets with the investment experts undertaking all the analysis of the companies to be invested in.
There are opportunities in the MENA region as well as other emerging market which these funds can utilize and generate good returns. In the MENA region, the IPO and pre-IPO market in Turkey looks promising in 2006 on the back of increasing investor interest by international investors especially in privatization projects. Accelerating privatization and pre-IPO initiatives in Iran, Egypt & Pakistan market are expected to boost economic activity. The fact that Jordan's IPO market consisted entirely of green-field companies did not deter investors from rushing to subscribe to the shares on offer as evident by the respectable oversubscription figures. Beside, the much talked about economies of India and China still offers attractive opportunities in private equity. In our own backyard the growing GCC region seems to be a hot destination for pre-IPO activity as the oversubscriptions in IPOs are reaching record levels.
Opportunity areas include utilities/ infrastructure with many privatization efforts being initiated in GCC (e.g. projects for power generation, gas distribution, water purification etc) to increase private sector participation. Real Estate sector looks promising with relaxation in ownership allowed by many countries. Health Care sector in MENA is likely to witnessed increased private participation in hospitals, pharmacy chains and specialty care projects. With a number of family businesses thinking of going public and the governments in the region keen on divesting the stake in the booing market, the pre-IPO funds provide an attractive option to the family business and government to divest strategic stakes to the fund. For the investors, investments in Pre-IPO opportunities have resulted in significant gains in recent past and will continue to be rewarding.
