IPO prospects remain poor after grim year

Bankers in the Middle East, who once profited handsomely on advisory fees for initial public offerings, will be hoping for a miracle this year.

They should not hold their breath. The value of first-time share sales, or IPOs, dropped 69 per cent in the Middle East and north Africa last year, according to a report released this week by Ernst & Young.

With the region’s corporates still coming to terms with debt piles and a tough lending environment, diversifying sources of funding – particularly through share sales – would be a welcome path to rebuilding balance sheets. But bankers expect IPO markets to remain subdued.

“The big reason why people would buy into IPOs was the leverage – and that isn’t there any more,” says one senior investment banker, who recalls the days when retail investors would borrow heavily from local banks to boost their allocations at the initial offering. With banks less keen to lend, retail demand is limited, he says, and offerings are unlikely to proceed.

From 2006, as IPO activity began to bloom in the region, global investors were keen to grab a piece of the emerging regional equity market. But debt woes in Europe, unrest across the Arab world and concerns over US economic growth have combined to damp down international interest in the region.

Just $843.9m was raised in regional capital markets last year, less than a third of the $2.8bn raised in 2010, according to Ernst & Young. The values raised in recent years are a far cry from the years of expansion, such as in 2007, when more than $10bn was issued.

Saudi Arabia, the largest Arab economy, was the region’s busiest market in 2011, with corporates raising $460.5m, compared with $271.3m in the United Arab Emirates.

With investors losing interest in regional stock markets, it comes as no surprise that IPOs are also faltering. The Egyptian exchange’s benchmark EGX30 index fell 49 per cent last year, and benchmark indices in Saudi Arabia and the United Arab Emirates declined 3 per cent and 17 per cent respectively. Volumes have also retreated.

Michael Bevan, the managing director of HSBC’s equity capital markets business in the Middle East, says low liquidity and cautious investors mean “only those companies with a really compelling story will be able to tap the primary markets”.

Prospects are not much better in other parts of the world. Global IPO fundraising slumped 45 per cent last year, according to the Ernst & Young report, with the majority raised in the first six months of the year.

But the Middle East has been particularly hard hit, and as deals have dried up, so have the equity capital market jobs in the region. Citigroup and Deutsche Bank have moved their regional heads of equity capital markets back to London.

The pickings are slim and fees have also declined, leaving dealmakers to fight over the scraps. Fees for IPOs decreased 23 per cent in Europe, the Middle East and Africa last year, according to data released this week by Thomson Reuters.

Alongside the lawyers, those that have remained in the region are holding out for Iraq’s long-awaited telecommunications IPOs. Three of the country’s fast-growing, highly profitable mobile operators are expected to go public as mandated by the conditions of their licences, though the deals have been delayed.

Others, such as Qatar Airways, have expressed plans to sell shares, though it and the bankers may be left waiting until global markets recover.