Sovereign investors pick emerging market IPOs

Upsurge seen in 2017 expected to encourage more emerging market companies to list

AVietnamese mall operator and Indian life insurers were just some of the stock market debuts that enticed sovereign investors to take chunky stakes in record numbers last year, and the trend shows no sign of stalling.

In data just released, the Sovereign Wealth Fund Institute data put the number of initial public offerings (IPOs) “anchored” by SWFs at a record 26 in 2017, with some $826 million (Dh3.03 billion) committed, up from $196.7 million (Dh722.4 million) in 2016. Taking an anchor or cornerstone stake means investors commit to a hefty investment in advance of the listing, de-risking the process.

The upsurge in interest from SWFs, which hold some $6 trillion in assets globally, could encourage more emerging market companies to list after a strong 2017 in which the Asia-Pacific dominated global activity by both number of deals and proceeds according to EY.

Funding database PitchBook, which also tracks the market, identified SWF participation in a record 28 IPOs in 2017, worth some $10.78 billion in total. “There’s no reason to think this will reverse or slow down,” said Doug Trafelet, managing director at PitchBook. “But these are big chunky deals, so they have to find the right opportunities to invest — they won’t do so blindly.”

This year Saudi Aramco will list in what is expected to be the world’s biggest initial public offering (IPO). China is building a consortium with its SWF CIC and state-owned oil giants to act as a cornerstone investor.

While Aramco won’t struggle to win interest, lower-profile emerging market companies are keen to bring SWFs on board to raise their profile and provide reassurance to other investors. SWFs are also seen as unlikely to flip the stock for a quick profit.

For the fund, it’s a way of getting a sizeable stake without paying over the odds, as fierce competition in private equity markets has seen deal values balloon over the last two years.

“Nowadays it’s a little bit more difficult to deploy money, so if you can take a 5-10 per cent stake in a company without driving up prices, then that’s interesting for an institutional investor,” said Markus Massi, a senior partner at The Boston Consulting Group.