Saudi Arabia: IPOs open to foreigners in new shake-up

Foreign investors are to be allowed, for the first time, to invest directly in Saudi stocks at the time of their IPO, the Kingdom’s Capital Market Authority (CMA), has announced. The long-awaited move marks, to many, the end of the distinctly Saudi practice of using the IPO market as a means to redistribute the country’s highly concentrated wealth to the wider public.

Taher Agueel

Foreign investors with at least $1 billion of assets under management have been able to access the Saudi Stock Exchange by applying for Qualified Foreign Investor (QFI) status. But they have only been able to invest directly in secondary equity deals, leaving primary offerings to Saudi investment funds, and, crucially, to the Kingdom’s many millions of retail investors.

From January QFIs will be able to place orders during the bookbuilding phase of Riyadh floats, the CMA said in August.

“It is a significant change,” says Taher Agueel, who sits on the boards of Merrill Lynch Kingdom of Saudi Arabia and of Prince Alwaleed bin Talal’s Kingdom Holding Company, one of the exchange’s bigger firms. “Local and international investors will be approaching the market on an equal footing.”

A head of Middle Eastern equity capital markets at a bank in London agrees. He says of the Saudi exchange: “In the past it was seen as redistribution. There were some problems with that, inasmuch as if you had a good company, the CMA would force you to do the IPO cheaply, because they would effectively set the price and you’d be having to give away your business to the public for significantly less than it was worth. 

So not many people – families, say, that had developed companies over 50 years – wanted to do that. You tended not to have many quality private listings come to market. So that’s going to be changed; the bookbuilding changes that.” 

By allowing foreign investors access to IPOs, Saudi Arabia may not only attract more private listings, but also break the chokehold Saudi investors, and by extension Saudi banks, have historically had on IPOs in Riyadh.

“It was really designed for the retail banks to make lots of money,” the banker says of the way things worked up till now. Because new stocks were offered at a huge discount and the Saudi population was encouraged to invest en masse, IPOs were often hugely oversubscribed. Because the IPO process was quite lengthy, Saudi banks, which, thanks to their presence around the Kingdom, could collect retail investments, would sit on that money for weeks and reap large sums from interest, the banker says. 

Foreign investor participation should erode that Saudi monopoly, the banker adds. He says he has long wanted to work on equity deals in Saudi Arabia, and may finally have the opportunity to do so. (HSBC is the only western bank with a long record of working on IPOs in the Kingdom.) 

Few IPOs have taken place in recent years on the Saudi exchange, despite it being the largest in the region (see graph). But bankers think the move will lead to more transactions, and will be especially positive when it comes to large deals, which require substantial investment and the professional methods of European and US institutional investors. Some have linked the CMA’s reforms to the planned flotation of Saudi Aramco, the state-owned oil company which is believed to be the most valuable firm in the world. 

But the banker says there would be other large deals before that one, since the government is implementing a vast privatisation programme as part of a 15-year reform vision for the Kingdom.

Not all are thrilled about the news, however. A second equities banker, at a large US bank, says his bank’s lawyers still will not allow him to underwrite Saudi IPOs “due to lack of protections” in the Kingdom. (Banks are required to underwrite IPOs up front in Saudi Arabia, which does not happen elsewhere.)

While he understands those concerns, the first banker says such fears are becoming less relevant, as Saudi Arabia is increasingly taking the concerns of Western banks into account. He adds that the CMA is more flexible when it comes to underwriting rules than the written law might suggest.

The CMA, once considered inflexible, now appears to be paying close attention to the views of international banks and investment funds. Allowing QFIs to invest in IPOs is the latest sign of that change. Agueel says: “The CMA is adjusting the rules and regulations in line with feedback coming from the market and international investors.” 

Johann Hattingh, CEO at Ashmore Investment Saudi Arabia, agrees with Agueel about the CMA’s approach to feedback. Though the fund Hattingh leads has a licence to operate as a domestic investor, and is therefore not affected by this development, he views it as a positive to the market as a whole. 

Far from representing an unwanted increase in competition for Ashmore, Hattingh welcomes the change, which he says could attract many more foreign investors, and thereby improve market liquidity.

The new IPO rule is just the latest in a series of changes at the stock exchange since 2008, each one opening up the market a little more to foreign funds,. 

The previous wave of reform came in May, when the requirements to obtain QFI status were eased, perhaps because, as the first banker says: “Very few [international investors had] bothered to go through that process.” If the Kingdom continues to introduce liberal reforms, market participants believe the Saudi exchange could, eventually, join the MSCI Emerging Market index.