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EMEA Equities IPOs: A standout region

19 July 2023

Barings’ Matthias Siller examines the initial public offerings opportunities across Europe, the Middle East and Africa.

For some time, the MENA/Gulf region has remained a buoyant initial public offerings (IPO) market, propelled by an ambitious objective to promote privatisation, inclusion and growth, attracting funds to the region and developing its capital markets.

This stands in sharp contrast to the much more downbeat attitude observed in developed markets, where IPO activity has dropped significantly over the last quarters. The reasons behind this global phenomenon vary from market to market, but overall rising legal and financial requirements for listed companies, generally lower valuations often render private equity an attractive and viable alternative to going public.

Remarkably, EMEA IPO activity recently begun spreading beyond the MENA region, best exemplified by the ongoing IPO of 20% of Romania’s renewable electricity champion Hidroelectrica on the Bucharest stock exchange - making it the largest IPO in Europe so far this year.

Contributing almost 30% to the largest Balkan country’s electricity generation, Hidroelectrica stands to benefit from its ability to grow further in renewable energy systems owing to its strong financial muscle amplified by low-interest EU Green Deal grants and an existing country-wide asset base.

We believe that this flotation will appeal to investors beyond the classic emerging market base such as developed European investors and environment, social and corporate governance-focused funds alike. A sizeable allocation to the local retail audience and pension funds should broaden Romania’s investor base, promoting the development of its stock market and improving overall liquidity. In turn, this is likely to boost the chances for an potential promotion of the Romanian market to developed market status (from frontier) over the course of 2024.

As for promotions, the Greek stock market’s impressive run this year (MSCI Greece up 44% in USD terms) re-ignited chatter of a return of Athens Stock Exchange into the fold of developed markets given ratings agencies are signalling a potential upgrade of Greek bonds to investment grade in the near future.

Reaping the fruits of a painful structural reform process, the last two years gave way to an impressive growth spurt, accompanied by falling unemployment and rising foreign direct investment. The Mediterranean country’s economy scores well by international comparisons and keeps surprising positively, driven, not least, by a strong tourism season.

The Hellenic Financial Stability Fund (HFSF) was set up and capitalised by the EU, ECB and IMF last decade, as a key instrument in avoiding financial calamity. The fund oversaw the merger of 10 Greek banks into four systemic financial institutions in 2013. A decade later, the fund’s equity holdings (listed entities) in National Bank of Greece, Alpha Bank and Piraeus Bank are destined to be sold to strategic investors or via secondary offerings on the stock market.

This sets the scene for the eventual liquidation of the HFSF in the second half of this year, creating a unique financial sector setup of a fully consolidated, free-float controlled banking sector. Reportedly, this process has attracted the interest of the Saudi Sovereign Wealth Fund (P.I.F.) with special consideration for the National Bank of Greece - the large 40% equity stake held by the HFSF allows for a rare opportunity of acquiring a 25% stake in a healthy lender based in one of Europe’s most promising macro backdrops. Most probably, the remaining stake would be sold on the stock market.

When this litmus test is passed, Greek prime minister Kyriakos Mitsotakis government’s intention to promote investment via (selected) privatisation will allow one of its key projects - the IPO of Athens airport – to go ahead.

Turkey has also seen a substantial increase in IPO activity over the last couple of years, with capital starved small- and medium-sized companies seeking to raise funds for further expansion or international market entry. Further, electric utilities are expanding rapidly as the country’s electricity demand continues to grow, driven by its young demographics and substantial investment needs.

A re-orientation of monetary and economic policy under the newly appointed finance minister, the market veteran Mehmet Simsek should realign cost of capital with reality, ending a period of financial suppression, which in turn, will prompt a return of international investors to the Turkish market. 

Whilst it is encouraging to see the IPO momentum spread beyond the MENA region in a period of a global dearth in public offerings, we take note of two very recent M&A transactions involving the Dubai-based, listed payment provider Network International and the Polish sport betting company STS Holding (Warsaw Stock Exchange-listed). Both companies were snapped up ‘on the cheap’ to be integrated into global or regional networks, highlighting the ongoing consolidation drive across several industries, a trend that has further to run in EMEA in our opinion.

By the same token, the world’s largest soda ash and sodium bicarbonate producer WE Soda (predominantly Turkey based and owned) decided to cancel its IPO process on the London Stock Exchange in June as the selling shareholder’s Ciner Group price objected to the prevailing valuation environment and decided to pursue private funding strategies to finance its growth plans.

Matthias Siller is the head of EMEA equities at Barings and co-manager of the Barings Emerging EMEA Opportunities trust. The views expressed above should not be taken as investment advice.

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