Oil prices and volatile markets mean few companies in the Middle East want to go public. How long before this drought of IPOs ends? George Mitton reports.

Two days before the start of the year, the Saudi regulator approved the public listing of shares in hospital operator Middle East Healthcare. Fund managers were excited by the opportunity to gain exposure to the country's attractive healthcare sector. But less than three weeks into the year, the listing was deferred at the company's request. (It was later rescheduled for early March.)

Why the delay? According to Germin Benyamin of Mashreq Capital, volatility in the market, the fear of low demand and the accompanying fear of a low valuation drove the company to push back its plans. "Everyone is postponing," she says.

The trend is discouraging for fund managers in region. New listings bring an increase in overseas investors' attention to the region and help to diversify the regional stock exchanges. But with the oil price staying low, with concern about a slowdown in China, and with volatile equity markets across the globe, some analysts are predicting this year will see even fewer listings than 2015, when initial public offerings (IPOs) fell far short of expectations.

For fund managers, the question is: how long before the IPO market picks up again?

DELAY, DELAY
According to Benyamin, an equity manager, regional companies have good reasons for putting off their IPO plans. No one wants to seek a valuation for their company at a time when valuations for the broad market are down. Neither do potential listers want to float their company only to see the stock price tank, as happened to some recently listed companies.

Take the malls unit of Emaar, the Dubai-based property developer, which generated huge amounts of attention with its IPO in 2014, one of the largest in the UAE for years. At time of writing, the stock is trading at nearly a fifth below its IPO price. NCB Capital, the Saudi bank, had a blockbuster $6 billion IPO at the end of 2014. Its stock has lost roughly a third of its value.

"If companies want to exit, they want to get the best valuation," says Benyamin. "How would they get the best valuation in the current environment? It's expensive to go for an IPO, what with the legal and investment banking fees. They wouldn't want to add an extra cost without having a secured return."

The same market factors that make companies wary of listing make investors wary of committing capital to newly listed stocks, which have not been tested in the market. Another concern is that transparency and disclosure standards in the region are not as high as in developed markets. As a result, investors are tending to hold only known, defensive stocks and large cash positions until the market picks up again. And, of course, the oil price is still low.

"There were few IPOs when oil was $45-$50 last year," Benyamin says. "When it's as low as $30, I wouldn't assume we would see many listings." 

THE NUMBERS
When all the negative factors are considered, it seems as though listings this year could be as sparse as in 2015, when there were 14 offerings in the region which together raised $2.5 billion, according to figures provided by consultancy EY. This was a sharp decline in number and volume from the previous year, 2014, when 27 transactions raised a total of $11.5 billion. Those numbers are not hard to explain. In the final quarter of 2014, the oil price began its precipitous decline, taking the prospects for IPOs in the MENA region down with it.

"There's no reason this year will be different to 2015," says Mayur Pau, MENA IPO leader at EY. "The market fundamentals are similar. All that's different is oil prices are lower and markets are fluctuating a lot more."

Pau confirms that candidate companies for regional listings are simply postponing their plans. There are some positive signs. He says EY is working with a number of companies in the region on IPO readiness exercises that help identify gaps to be filled before a public listing is possible. Typically, companies are ready for an IPO six to 18 months after completing their readiness exercise. He expects a number of new listings once market conditions improve. But how long until that happens? No one is sure.

In the meantime, companies are meeting their funding needs with bank loans or by issuing bonds or sukuk.

"The question for business owners is, when is the right time for me to raise capital at the optimum price that I believe my business is worth?" he says. "If you need cash, there are other ways to get it."

PERCEPTION
In some cases, issues of prestige as much as market realities are pushing companies to delay their IPO plans. This is especially true of family-owned business. Many of these firms recognise the benefits of seeking public listings, but fear risks to their reputations.

"The family businesses are the ones that needed to have IPOs a couple of years ago," says Jahangir Aka, MENA head for asset manager Neuberger Berman. "They've always been the most likely candidates, but the reality is that if they come to market now, it's a clear statement that they need cash, and that's not a statement any of these firms want to make. It's a chicken-and-egg problem."

Aka also highlights that businesses have alternative funding sources to turn to, which in many cases are more suited to their established ways of working. To arrange a bank syndication or to issue a bond requires less public disclosure than an IPO, plus it is often cheaper and requires less engagement with investors.

"Most people find it less cumbersome to deal with bondholders than to manage shareholder investor cycles," he says. "We are starting to see some pick-up in activity in the syndication and bond market lately."

THE BIG ONE?
Amid such a gloomy outlook for IPOs, there has been a spot of interesting news. Comments from the Saudi leadership have signalled the tantalising possibility of a wave of privatisations of the Saudi state. The leadership has good reasons for pursuing a privatisation agenda. With government revenues plunging due to the low oil price, the Saudis have to look at ways of making money. Taking some of the state-owned companies public could also have the effect of making them more efficient and competitive.

Investors and analysts are most excited by the idea of Aramco, the state-owned oil company, listing shares. Aramco is probably the biggest company in the world, with sole ownership of Saudi Arabia's vast oil reserves. The firm is likely to be worth many trillions of dollars. But how long before Saudi Arabia is ready to list such a treasured possession? The answer is yet to emerge.

There is one more piece of good news. According to the Saudi regulator, Middle East Healthcare has rescheduled its IPO to take place between March 3-9. At the time of writing, the company had set its share price at 64 Saudi riyals ($17) a share. Maybe this year will see some IPO activity after all.

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