Warburg Pincus and General Atlantic’s purchase of 49% of Network International, the Middle East payment solutions provider, made a few headlines in the trade press in November, but perhaps the more interesting angle to the deal is behind the scenes.
The two private equity heavyweights bought the stake from Abraaj Group, the Middle East’s pre-eminent homegrown name in private equity, which itself bought the stake through one of its funds in 2011. (The rest is owned by Emirates NBD, which will continue to own 51% for the foreseeable future.)
Abraaj professed itself as delighted with its exit, which at almost five years is exactly the sort of time horizon it typically looks to. But a sale to other private equity houses was not originally the plan.
The expectation had been that Abraaj would monetize its investment through an IPO: Bank of America Merrill Lynch, Goldman Sachs and JPMorgan Chase had all been linked with a float. But the idea was apparently shelved because of the moribund environment in GCC equities, which have fallen on the back of low commodity prices and broader concerns about emerging markets. Dubai Financial Market’s general index, for example, was down 21.97% year to date at the time of writing: a miserable market to try to raise new equity capital in.
|Mustafa Abdel-Wadood, partner and global head of Abraaj’s regional funds business|
In public statements, Abraaj has said that in fact it was just a question of a better deal being on offer through a direct sale.
“We were considering an IPO as one of the strategic options,” said Mustafa Abdel-Wadood, partner and global head of Abraaj’s regional funds business. “However, early, in the process, we received a valuation that made a lot of sense from a strong group of buyers, and therefore went down that route instead.”
But the fact that a trade sale offered a better outcome than anything available in the capital markets speaks to a growing sense of limitation within those markets.
Euromoney has written frequently on the mounting liquidity problems in the Gulf’s debt capital markets, but things aren’t great on the equity side either.
The ascension to the MSCI Emerging Markets index by Qatar and the UAE has not, as some expected, been accompanied by new listings, which would bring needed depth, variety and liquidity to those markets.
Qatar, for example, seems becalmed with 44 listed companies; fund managers there say that, much as they would love to see groups like Qatar Airways or some of the state-owned petrochemical businesses listed, they see very little sign of it actually happening.
The free float of most of the big companies is still relatively small, and there are even whispers of MSCI considering putting the market back in the frontier index again if companies don’t list more equity.
In the UAE, which has no less than three markets, none of them has seized the chance to be dominant; Dubai’s in particular – the market where Network International would presumably be listed – is heavily lop-sided towards members of the Emaar group and Emirates NBD.
Saudi Arabia, in the year that it has opened its doors to international capital, has suffered a drought for new listings too, although at least here there does finally seem to be something happening.
On November 25, Saudi’s Capital Market Authority said that Andalus Property Group had been given approval for an IPO of 21 million shares representing 30% of the company’s share capital.
It’s not clear how much the IPO will raise, but at least it’s something
As the first float since the opening of the market, it will be closely watched. Traditionally IPOs in Saudi have been used in part as a method of wealth distribution.
They are often priced below what would be considered fair value in developed markets, in order to give the near certainty of price appreciation to the many retail investors who dominate turnover on the Saudi Exchange.
But the point of opening the market to foreign institutional investors was to bring about a change in the way the market behaves, to reduce volatility and to dampen the impact of retail whims.
It’s interesting, then, that the CMA says a portion of the shares will be allocated to institutional investors via a book-building process, although that’s not actually unusual, with chunks of IPOs often being set aside for Saudi state pension vehicles like the General Organization of Social Insurance (GOSI).
Then the remainder were to be offered to the public from December 17 to 23 (after Euromoney went to press).
The pricing of the deal gives us a clue as to whether Saudi is moving towards more international norms.
Saudi really has, through no fault of its own, picked a hellish moment to open its markets: the market’s Tadawul All Share Index was down 16.6% year to date at the time of writing as the low oil price has started to hit the petrochemicals sector, and public finances have started to hurt.
Saudi has so far attracted very little new international capital since the opening, although there have been some encouraging signs such as BlackRock launching a Saudi ETF in New York.
With hydrocarbon prices likely to be low for the foreseeable future, sentiment in Gulf markets weak, and liquidity tightening, 2016 is going to tell us a lot about the true depth of GCC capital markets.