These Funds in Saudi Arabia Are Almost Extinct as IPOs Fade

(Bloomberg) -- Betting on initial public offerings in Saudi Arabia in the past few years has proven to be a bad idea.

Not too long ago, funds focused on buying IPO stocks boomed in the kingdom as regulators implemented reforms aiming at increasing institutional participation in the Arab world’s biggest equities market. In 2015 alone, 16 such pools were created, with total assets approaching 4.9 billion riyals ($1.3 billion). Most of them had a mandate to invest in new stocks sold locally in their first three years of trading.

A fast-forward in time exposes a bleak scenario. More than a third of the funds created in that year have already been liquidated, and total assets under management for those active plunged more than 80 percent to around $207 million. Not a single one of the pools still open has delivered a gain in the past 12 months. That’s a sharp contrast to the overall performance of the main Saudi equities index, which is up more than 16 percent in the past year.

“Many of these funds are dying,” said Mazen Abou Atie, the acting head of asset management at Alkhair Capital in Riyadh. The firm started an IPO fund in June 2015. “The universe they can invest in is very restricted, and no fundamental is valid for those shares. If you are overweight the shares, you will end up increasing your losses,” he said.

These Funds in Saudi Arabia Are Almost Extinct as IPOs Fade

What Happened?

The change in fortunes is in part a consequence of the headwinds that have battered the $537 billion Saudi stock market in the past few years. A drop in the price of oil hurt the country’s public finances and overall economic sentiment. A succession of domestic woes also had an impact. In November 2017, dozens of businessmen were detained in a so-called crackdown on graft, adding to the overall sense of caution. Funds tied to the government were constantly blamed by traders and analysts for pumping up prices.

The hope that such funds would fly relied mostly on the prospects for new offerings. Regulators made their creation easier as they aimed to boost the participation of professional investors, as the country’s government sought to bring more institutions to a bourse dominated by individuals.

With the change in sentiment, retail investors fled the stock exchange, leading to a slump in the average value of trade, while new offerings became scarce. The Saudi stock exchange, known as the Tadawul, hasn’t executed its own plans for an offering in 2018 and only three new deals since the start of 2015 have raised more than $200 million.

The potential sale of a stake in giant oil producer Saudi Aramco, expected to take place in Riyadh and on a bourse abroad, would be the biggest IPO ever and a game changer for the category of funds. But it has been postponed after international investors balked at Crown Prince Mohammed bin Salman’s $2 trillion valuation.

OTHER HIGHLIGHTS:
  • 21 of the IPO funds are still active, but only two have more than 100 million riyals in assets under management.
  • May 2016 was the last time one of this type of funds was launched.
  • The largest IPO in Riyadh since 2010 was National Commercial Bank, which raised 22.5 billion riyals in 2014.
  • Most of the new stocks sold since 2015 are trading lower than at the time of sale.

To make matters worse, the investment category won’t benefit from expected inflows following the inclusion of the country in emerging-markets benchmarks compiled by FTSE Russell and MSCI Inc. this year. That’s because most of the stocks they buy don’t meet the criteria stipulated by the compilers as they are too small and not very liquid.

As local investors and analysts remain skeptical of a pick up in new issues, the funds could soon become an obsolete product, according to John Sfakianakis, chief economist at the Gulf Research Center in Riyadh.

The funds “didn’t fly because the expected IPOs didn’t happen,” Sfakianakis said. That’s unlikely to change “at least over the immediate horizon,” he added.

©2019 Bloomberg L.P.