The Gulf is seeing a surge of IPOs this year as high stock market valuations tempt firms towards floating, while a move to diversify away from fixed income increases the appeal of equity capital raising. But although corporates are crowding into the market, where they list is another matter. With multiple exchanges offering different attractions, this week we take a look at where the money is really going – and why?
The UAE is expecting an equity boom this year, with GDP expanding by 5% in 2013 and 2014 according to the Dubai Chamber of Commerce, and the upgrade to Emerging Markets status by MSCI in June boosting investor interest. This is translating into increased confidence in the capital markets, and according to a recent report from EY, capital raised in the UAE and wider MENA region reached its highest levels since 2008.
“If 2013 was a year when the UAE’s capital markets staged a strong recovery, I believe 2014 will show that it was built on solid foundations. Activity will gather pace and opportunities will grow,” said Hamed Ali, CEO of NASDAQ Dubai. This is supported not only by rapid economic growth, but by an increasing efficiency and expansion of the capital markets themselves, which is offering a more attractive framework for both issuers and investors to participate. “We believe that the current environment is truly excellent and favorable to seeing an IPO backlog of recent years flooding onto the market,” confirmed Essa Kazim, the chairman of the Dubai Financial Market (DFM).
According to EY, 23 IPOs in the region last year raised US$3 billion, an increase of 64% over 2012 – and a recent DFM survey shows that 76% of investors are ready to participate in IPOs within the next 12 months, with a focus on government firms, private companies and family offices.
“You have an economy that is very buoyant,” explained Rizwan Kanji, a partner at King & Spalding in Dubai. “This upward trajectory translates into the equity markets, which translates into alternative investment. While there has been a lot of debt issuance, institutional investors need to diversify their investment profile and in the absence of any other highly traded secondary market, IPOs are a way to raise extra capital and help firms expand and grow.”
A flurry of activity from UAE firms appears to confirm this analysis. And activity is occurring across all ends of the spectrum: from smaller firms such as Dubai freight-forwarding company Able Logistics (annual turnover US$200 million) which has announced intentions to float on the DFM towards the end of the year; to behemoths like Abu Dhabi-listed Aldar Properties, which plans to spin off its buildings and maintenance subsidiary Khidmar, which last year saw revenues of AED156 million (US$42.46 million).
Dubai drives forward
The UAE has launched into this new trend with enthusiasm, following a dry spell for listings that saw a drought of five years for DFM and a slow start for its younger offshore sibling, NASDAQ Dubai – along with just a few smaller sales for their larger peer, the Abu Dhabi Securities Exchange (ADX). However, the National Bank of Abu Dhabi has predicted that six or more UAE companies could go public this year, and the current status certainly looks promising.
The five year lull was broken by the announcement of newly incorporated firm Marka applying for an IPO of 55% of shares on the DFM to become the UAE’s first public shareholding company in the country’s retail sector.
Nasdaq steps up
DFM is the larger of Dubai’s two main exchanges, with share traded value in 2013 of AED159.9 billion (US$43.5 billion) in 2013, compared to US$633 million for Nasdaq Dubai. The smaller exchange, which was bought by DFM in 2009, has struggled with a slow start and low trading volumes since its launch in 2005 as the Dubai International Financial Exchange. However, the bourse has over the past 18 months made a concerted effort to expand and improve its offering, and is now reaping the returns – with the recent IPO of Shariah compliant Emirates REIT seeing 3.5 times oversubscription, increasing its base offer to US$175 million due to the strong demand and seeing strong liquidity in trading since its launch.
“What we have seen over the past year is enhanced activities on the exchange,” explained Hamed to Islamic Finance
news. “We have been a lot more active compared to previous years. We have been leveraging and capitalizing on the relationships we have with the market, we have been actively meeting with advisors and companies to discuss requirements.”
Over the past 18 months NASDAQ Dubai has attracted 22 listings, including both IPOs and debt – compared to just two secondary debt listings in the four years before that. And the pipeline for IPOs on the exchange is healthy. Rizwan confirmed to Islamic Finance
news that King & Spalding are working on a further three IPOs preparing to launch on NASDAQ Dubai, and the firm expects increased activity on the equity side to continue.
The exchange has undertaken a number of key initiatives to encourage firms to list, and there is no question that this has made a difference. The listing process has been streamlined to make it more competitive with international markets in terms of timing and documentation, while it has also expanded its existing asset classes and plans to introduce new types of securities in 2014. The bourse in 2013 also established an advisory group of local consultants to prepare a junior stock market for listing IPOs from local SMEs, with Hamed noting that: “High quality SMEs are vital to the expansion of the UAE’s economy, but many are starved of the capital they need to grow. An IPO on NASDAQ Dubai will enable them to raise the funds they need.”
And just this month the Jebel Ali Free Zone Authority (JAFZA) urged its free zone-registered companies to raise capital through the equity market by listing on NASDAQ Dubai to fund their growth. The zone offers a new business framework which enables its 7,300 firms to apply to directly list as little as 25% of their shares on the exchange.
Looking at these movements, it would be easy to think that NASDAQ Dubai was forging a position for itself as the leading listing location in the region. But in fact, the two Dubai exchanges play very different roles. The DFM is an onshore platform, meaning that there are more complex local regulations and approvals required. In comparison, NASDAQ Dubai is regulated by the Dubai Financial Services Authority (DFSA) and located in the Dubai International Financial Center (DIFC).
“You would probably go to DFM if you want to appeal to the local market, to local investors. But if that is not your investor profile, then you would instead go to NASDAQ Dubai and access international and institutional investors who operate out of the DIFC and you are able to appeal to them through that channel,” suggested Rizwan.
“It is a choice we offer investors,” agreed Hamed. “Companies have different directions and companies have a choice between two platforms. The DFM is mainly suited to local and regional companies. NASDAQ Dubai offers access to two unique liquidity pools (both local and international), for a new tranche of companies – such as freezone companies, international companies, as well as companies who want to grow beyond this region.” However, the two exchanges work very closely together, and over the last four years have consolidated their investment base so that investors with access to one exchange can use the same access to trade on the other.
But despite this collaboration and strong performance, the regional exchanges continue to face challenges such as restrictive regulations and foreign ownership rules (in the case of DFM) and low trading volumes (NASDAQ Dubai) which have in many cases sent local companies to try their luck abroad. London is an increasingly popular listing location for GCC firms, and the past year has seen a number of new firms look west.
Last year Dubai property firm DAMAC listed US$500 million in depositary receipts in London, in the first Dubai IPO since 2008. Abu Dhabi-based Al Noor Hospitals Group also launched a Shariah compliant IPO in London in June, as did NMC Health. DP World in 2010 decided to list on the London Stock Exchange (LSE) after shares traded on NASDAQ Dubai failed to attract the expected investor interest after its 2007 US$5 billion IPO. And this year, Abu-Dhabi based Gulf Marine Services also announced its intention to list on the LSE to fund its growth plans.
So what is the appeal of London that attracts these firms to abandon their local listing venues? Ibukun Adebayo, the head of emerging markets at the LSE, explained to Islamic Finance
news that the main reason is the access to an extraordinarily deep pool of capital, the proximity to major global markets, and the wide geographical mix of investors. “If you wanted to create the widest possible distribution for your IPO, you would probably consider London.”
London also tends to offer a lot of choice in its markets. The main LSE market offers two standards – the premium standard, for those companies that want to meet the higher standards of disclosure, and a standard listing that is equivalent to the EU minimum standards. It also offers a wide range of asset classes within asset classes, such as depository receipts as well as ordinary shares. “It’s about choice,” said Ibukun. ”Companies from the Middle East come in different shapes and sizes, and we have appropriate markets for them. And for companies that are looking to grow beyond the region and expand internationally, London offers a real global international benchmark.”
While other European exchanges such as Luxembourg and Paris are also moving into the space to try and compete to attract emerging and Islamic IPOs, the LSE has for some time now been actively encouraging participation from the developing world which has given it an edge over the competition. “We are absolutely focused on increasing our product offering in terms of the markets that are available to companies,” confirmed Ibukun. “We are working much more closely with exchanges globally, and there’s been a lot of effort put into understanding the market infrastructure to ensure seamless trading of stocks once they are listed.” The LSE last week announced the first dual listing between London and Nigeria with the US$500 million IPO of petroleum firm Seplat, and in the first quarter of 2014 the exchange has already seen 31 IPOs raise US$9 billion – a 121% increase on last year.
“London has always been able to understand international business to a point where it is able to price the risk involved in investing in emerging markets, and it does that very well. This year you will see the LSE very visible in the Middle East, and there is a healthy pipeline of companies that are considering listing on the LSE from the GCC and the wider Middle East region, while we are also focused on expanding our African business,” predicted Ibukun.
Linking the markets
But with the LSE keen to expand further into the Middle East, it is to be hoped that this will lead to a greater collaboration between the global exchanges. While GCC firms have been listing on the LSE, there have also been some firms from Europe looking towards the Gulf and Rizwan believes this will also continue as firms identify listing venues based on their investor targets and needs. “We are working on two IPOs at the moment that are international but coming to list here. You might go to London to diversify your portfolio of investors, tap a mature market and get international exposure. But if your corporate plan is to create a nexus with the GCC in the future, then it makes sense to use your listing venue as a stepping stone for that.”
Ibukun agrees. “Both London and Dubai are important financial centers, and where the company has some form of local presence and is trying to build a business in day to day operations, it might make more sense for a firm to list in Dubai.” And while London might offer compelling advantages, Hamed points out that: “Companies that choose to list away from their home market miss a key benefit, which is access to regional investors. Your stock prices can perform much better if you give your home market access to your shares. Our goal, from a geographical point of view, is to attract participants from the region.”
Share the love
An answer for this that is becoming increasingly popular is the option of dual listings. “From a strategic, technical perspective we are seeing more firms listing on multiple exchanges – both internationally and regionally,” confirmed Rizwan. “You might have a firm registered on Tadawul who is looking to do a secondary listing in Dubai to access those investors. Going forward, this activity is likely to increase.”
Dubai-based Emaar Properties last month announced that it was planning to list its malls business in a dual IPO on the LSE and NASDAQ Dubai, and this choice is also looking increasingly attractive. Both exchanges encourage this, as it increases cross-border trade flows and improves international relationships. “We positively encourage dual listings,” said Ibukun. “The aspect is widening the pool of investors that companies have access to. In London we have a large number of longer-term, infrastructure-type investors such pension funds and insurance funds as well as a mix of shorter-term investors. The Middle East may have other types of investors. It is the symbiosis of all of that together that creates the right investor mix for companies.”
Hamed agreed that: “We look at ourselves as a growth platform for companies. We want to be there for them in whatever shape or form helps them become visible in this region, and enhances their visibility beyond the region.”
Collaboration not competition
This collaborative aspect is an emerging theme. London might be a complementary alternative to the GCC, but it is not the only alternative – domestic markets will always service domestic clients best, and local firms will always seek to be financed locally.
“All exchanges have realized that now is not the time to compete but to collaborate, and we are seeing far more instances of collaboration than direct competition between the exchanges,” emphasized Ibukun.
This could in fact have a negative impact on the bigger global exchanges, as regional bourses start to work more closely together. The DFM and ADX have long been in talks regarding a potential merger, while agreements have been signed between exchanges across the region to collaborate and share information. As this expands their regional and international reach and increases their efficiency and transparency, more firms may choose to list locally.
“Where there is harmonization in the rules and collaboration between the stock exchanges, I am sure this will have some form of effect on the traffic coming through to London, as exchanges in the region start to work together,” agrees Ibukun. “But companies will always have some non-finance and non-regulatory reasons for listing overseas and I think those will remain intact.”
The LSE has numerous collaborations globally – some of them directly through the use of interfacing with products. Across the African region it has partnerships with a number of local exchanges that use LSE trading technology, and the bourse has also extended that to cooperation on cross-listing and dual listing agreements. And as Dubai is a significant shareholder in the LSE, it is unsurprising that greater cooperation could be sought. “In the Middle East specifically, we have a high propensity to want to work with the local exchanges. Although there is nothing to talk about right now, there is always an open door for that,” confirmed Ibukun.
And this works both ways. “Absolutely we would be interested in partnerships,” said Hamed in response. “We are in the business of building bridges, and facilitating growth for the companies we have listed with us. Over the coming period, the market will see us more active in collaborations and partnerships with other participants as we move forward. Growing the capital market is not something just one exchange can do – it is a collaborative effort between multiple participants in the market.”
With the IPO market on the rise and international exchanges keen to collaborate, it looks as if we can expect exciting things from the equity space this year. — LM