IPO activity falls in region, but long-term rationale still strong

The IPO activity in the Middle East subsided substantially during October-November last year as the firms raised $22.4 million (Dh82.2m) against $6 billion during the same period in the previous year, according to Ernst and Young's year-end IPO Update.

The global advisory company has attributed the decline to poor investor sentiment and the impact of the global economic downturn on the regional markets.

The firm said that just three IPOs hit the market during October-November period last year against 10 public offerings in the same period of 2007.

During 2008, Saudi Arabia, the UAE and Egypt were the top three markets in terms of capital raised accounting for 78 per cent, 10.3 per cent and 4.7 per cent respectively.

"Though the $13.4bn raised through 55 IPOs during January–November last year was 4.6 per cent higher than the $12.8bn raised in all of the previous year.

"The drop in activity in the last two months of 2008 is the result of current investor sentiment and the effect of the global financial crisis on regional markets.

"Issuers are not willing to accept current market valuations and therefore scheduled IPO's coming to the markets are being delayed. Nevertheless, companies are preparing for IPOs because the long-term strategic rationale for such transactions has not changed," said Phil Gandier, Partner, Transaction Advisory Services, Ernst and Young Middle East.

Azhar Zafar, Head of Mergers and Acquisitions at Ernst and Young Middle East, said: "Investor confidence and willingness to list have clearly been affected by current market conditions. Despite the drop in listings, the pipeline of companies preparing for IPOs remains robust. This reflects the new corporate understanding that the journey to an IPO is a transformational process. Our own research shows that outperforming companies start preparing to list a full 12 to 24 months before actually going public."

He said that although it is difficult to predict when IPO activity will recover, smart companies will use the current time to fully prepare for the turnaround in investor sentiment. Regional capital markets need to stabilise in order to rebuild confidence and in order for IPO opportunities to re-emerge.

Global IPO activity has more than halved since 2007. During the first 11 months of 2008, a total of 745 IPOs worldwide raised $95.3bn in capital.

This compares with 1,790 IPOs over the same period in 2007, which raised $256.9bn in capital.

IPO activity has also fallen in emerging markets. Brazil, Russia, India and China (Bric) markets recorded 163 IPOs raising $28.0bn in capital in the first 11 months of 2008 compared to $106.8bn from 365 IPOs in the same period in 2007.

Asian IPOs have generated the most capital this year to date ($29.7bn). By number the most active regions are Asia (337 IPOs); Europe (161) and North America (91). Of the top 20 IPOs, 15 are from emerging markets.

The deal threshold required to make the top 20 has fallen significantly since 2007 when the minimum deal value required to make the group was $1.9bn; the group threshold for the 11 months to November 30, 2008, is $0.85bn. The leading sectors by number of deals were materials (183 IPOs); industrials (105); and high technology (81).

The top three sectors (out of 12) accounted for 63 per cent of total capital raised: financials ($26.2bn), energy and power ($ 18.3bn), and materials ($16.0bn).

Globally, the top three IPOs by capital raised were Visa, the largest United States IPO in history, which raised $19.7bn; China Railway Construction Corp ($5.7bn); and the Brazilian energy company OGX Petroleo e Gas Participacoes ($4.1bn).

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