A raft of privatizations in the United Arab Emirates is driving an initial public offering boom that is heightening competition among local and international banks for advisory mandates and putting pressure on the fees these institutions can charge.

The aggregate value of UAE IPOs so far in 2022 is higher than in any year since before 2008, S&P Global Market Intelligence data shows. Real estate developer TECOM Group PJSC, ultimately owned by Dubai's ruler Sheikh Mohammed bin Rashid Al Maktoum, is the latest state-owned entity to go public. Several more listings are on the horizon as the federation seeks to create broader, deeper public markets and diversify its economy.

The privatization drive is creating opportunities for banks to advise the government and corporates on these listings. Competition between international and domestic banks for advisory roles is "only going to increase," according to Samer Deghaili, head of capital markets for Middle East, North Africa and Turkey at HSBC Bank Middle East.

This will have a knock-on effect on the profits banks reap from advisory work, said Deghaili.

"The Middle East has been the busiest region within [Europe, the Middle East and Africa] in 2022 and that will attract more interest from international banks wanting to get involved," said Deghaili. "Greater competition will impact fees over the remainder of 2022."

Market momentum

In November 2021, a top Dubai government official said 10 state-linked companies would list on the Dubai Financial Market (DFM) PJSC with the aim of boosting market capitalization to 3 trillion dirhams, or about $817 million. A subsequent note by government-run Emirates NBD Bank PJSC said these would include road toll operator Salik, district cooling provider Empower, Dubai Duty Free and hospitality conglomerate Jumeirah International LLC.

Dubai's privatization drive follows similar moves by Abu Dhabi, seat of the federal government and source of almost all UAE oil reserves. Last year, Abu Dhabi National Oil Co. listed two units — ADNOC Drilling Company P.JSC and Fertiglobe PLC — on the emirate's bourse, raising a combined $1.9 billion. State-controlled satellite operator Al Yah Satellite Communication Co. PJSC also joined the Abu Dhabi Securities Exchange, raising $731 million.

Emirates NBD Capital is acting as joint global coordinator and joint bookrunner on TECOM's float, along with First Abu Dhabi Bank PJSC, The Goldman Sachs Group Inc., Morgan Stanley and UBS Group AG. A global coordinator organizes most of the IPO-related activities including planning, preparation, execution and marketing.

First Abu Dhabi and ENBD dominate domestic IPOs, said Shabbir Malik, bank analyst at EFG Hermes in Dubai. "These two banks are best positioned because of their size, proximity to the government, retail distribution, and client base," he said. "They will benefit more than other local banks."

Malik noted that Dubai Islamic Bank PJSC will likely also play a role in future Dubai floats.

Government-owned Emirates NBD, a subsidiary of which also manages the UAE Strategic Investment Fund, is required to go through the same selection process as any other bank, said Ahmed Al Qassim, group head of corporate and institutional banking at the lender.

"Do we have an advantage compared to other international banks?" said Al Qassim. "We're usually a major lender to the entities going public and have built a strong relationship over years of experience working with them. We understand them better than other invitees."

The bank is able to offer a range of services relating to the IPO process, Al Qassim said, including short-term loans for retail investors to invest in IPOs and leverage against securities for corporates. A float can often lead to further business for an advising bank, which Al Qassim said the ENBD can also provide.

"Private companies usually want to do a dividend recapitalization for their shareholders pre-IPO and typically move from a conventional overdraft to a syndicated revolving credit facility," said Al Qassim.

Fees in focus

The glut of IPOs is attracting growing interest from global investment banks. HSBC was joint global coordinator — along with Citigroup and Emirates NBD Capital — on the IPO of state-owned Dubai Electricity and Water Authority (PJSC), or DEWA, which sold nearly $6.1 billion worth of shares in April. It was the UAE's largest-ever IPO, and the biggest in EMEA in 2022. It attracted orders of $85.7 billion.

"We have been involved in all recent UAE IPOs and every IPO last year and this year, so we've seen the increase in investor interest, how the mix of investors has changed and how the quality has improved over time," said HSBC's Deghaili. "Many institutional investors are expanding their bandwidth for the region and opening offices here."

Yet, this heightened competition is having a negative impact on the fees banks can command for their advisory services. The fees generated on UAE IPOs are "typically very tight and are incomparable to the fees that banks can earn when U.S. companies go public," said EFG's Malik.

"It's definitely positive for participating banks, but it's hard to quantify how much they'll make in terms of fees. Management has cautioned us not to get too optimistic about IPO-related fees," said Malik.

The size of the DEWA IPO means it should create a "decent-sized windfall" for Emirates NBD, Malik said. The bank is "aggressively trying to get into every potential IPO" across the region, CEO Shayne Nelson said during an earnings call in April, though he warned that these will be of a lesser scale.

"DEWA was a monster. And it was one of Dubai's crown jewels. So I don't expect we'll get something like that in this year," Nelson said. "It was a great deal. But we wish there was more of them."

Full steam ahead

Gulf stock markets are wholly or majority state-owned, so floating government-run companies also help boost state revenue as trading volumes and turnover increase. "It's in our interests to make sure our capital markets are as deep and sophisticated as possible," said Emirates NBD's Al Qassim.

Even though upcoming listings may not be of the size of DEWA, the current flurry of activity is more sustainable than previous IPO booms as it is part of a wider, well-defined government strategy to expand and diversify the market, said Deghaili.

"Government companies going public bring prize assets to the market, create momentum, get investors excited and bring new liquidity," said Deghaili. "That paves the way for commercial businesses to follow."

As of June 24, US$1 was equivalent to 3.67 Emirati dirhams.