Last week, Nahdi Medical became the latest benefactor of a surge in the popularity of Middle Eastern IPOs as a safe haven for investors to hide from geopolitical turmoil and inflation in Europe.
The Saudi pharmacy chain raised $1.36bn and popped a solid 15% on day one, an aftermarket performance that companies in Europe could only dream of earlier this year, before the war in Ukraine shut down their market overnight.
Enviable pop aside, however, the deal also showcased a major weakness in the capital markets that are developing in the gulf states.
Nahdi began its institutional bookbuild on March 1. This went on for seven days. Three days after the books were closed, the company announced that the offering had been priced. Three days after that, the subscription period for retail investors began. This lasted two days. A week later, on March 22, trading finally began.
For the sake of comparison, Vår Energi, the Norwegian oil and gas company that opened the books on Europe’s biggest IPO so far this year on February 7, started trading nine days later.
A three-week process would be a nailbiter for issuers and investors at the best of times, nevermind this year, when fingers have already been burned several times by sudden and brutal volatility originating outside the Middle East.
Middle Eastern governments have taken a number of steps in their mission to create deeper and busier capital markets.
The UAE changed its IPO rules last year to allow the founders of private companies to sell up to 70% of their share capital instead of the previous 30%. It also officially switched from a Friday-Saturday weekend to a Saturday-Sunday one to be better aligned with the non-Arabic world.
Then, in November, Saudi Arabia floated the Tadawul, the region’s largest stock exchange, following a structural overhaul.
But the IPO process remains lengthy, in part owing to rules such as the one in the UAE that stipulates that at least 20% of the shares of an IPO must be offered to retail investors.
For now, this time-consuming process may be actually pushing the development of ECM in the region forwards, rather than holding it back.
Equity capital markets activity in the Middle East is still driven by governments listing state-owned companies — not because they need the money, necessarily, but with the aim of paving the way for private companies to tap the capital markets.
However, some market participants have expressed doubt that the private sector is ready to take its turn.
One thing that would be helpful to get it there would be a strong local culture of equity investing. A thorough bookbuild including a period dedicated to local individuals should be seen as an opportunity to establish just such a culture.
International institutions are, of course, a great source of capital for the Middle East, as they are elsewhere. But it is also possible for equity markets to exist — or even thrive — primarily on the back of domestic demand, like the Nordics do.
What they cannot exist without is issuers. The capital markets need to be well established as potential tools in the minds of the owners of private businesses if those markets are going to to grow.
And what better way for Middle Eastern entrepreneurs to get acquainted with the capital markets than as investors?