Working harder for smaller deals that bear less fruit

An old joke tells of two matrons having lunch at an expensive restaurant. One lady says: 'The food is so bad.' The other says: 'Yes, and the portions are so small.' This neatly sums up initial public offering (IPO) bankers' first half: markets are challenging and brokers are working harder to sell smaller deals for less fee income. Bankers' complaints about difficult deals are likely to be followed by grumbling that they don't have enough of them.

Asia-Pacific generated new listings of only US$19.2 billion equivalent in the first half, according to data published by Thomson Reuters. That computes into a whopping 62 per cent drop in IPOs in dollar terms compared with the same period last year, a decline that came largely (but not exclusively) thanks to successive bouts of euro-zone panic.

Not only were there fewer IPOs in the first half in Hong Kong, but deal sizes were also smaller. The Canadian energy firm Sunshine Oilsands delivered Hong Kong's largest initial public offering in the year so far, raising US$578 million in March. Haitong Securities came to market with a quasi-IPO, raising US$1.8 billion, but this technically was a follow-on offering, on account of its listing on the mainland.

Asean countries produced the largest IPOs in Asia-Pacific in the first half. Malaysia's Felda Global Ventures, a palm-oil producer, recently raised US$3.1 billion with a successful listing on Bursa Malaysia. Thailand's Tesco Lotus Fund, a property vehicle, raised US$601 million. Malaysia and Thailand are the only two markets to have generated growth in equity volumes.

Regional equity issuance has also been dominated by follow-on offerings; that is, share offers by companies that are already listed. The US$6 billion block trade by AIA in March in Hong Kong was the largest transaction in the Asia-Pacific region (excluding Japan) this year to date.

In terms of industry sectors, financials (including banks and insurance companies) and oil and gas firms continue to dominate, but consumer stories have become more difficult to market.

Mainland brokers increasingly feature on prospectus covers, with five such names now in the top 10, and three in the top five, as ranked by fees. But that's also because commissions for IPOs remain higher on the mainland than in other regional markets.

However, US and European bulge bracket houses still dominate when it comes to the larger deals.

In volume league tables, only three Chinese houses appeared in the top 10 - all at the bottom end of the list. With the recent postponement of Graff Diamonds' IPO, and insurer People's Insurance Company of China's dual A-and H-share offering, however, larger deals are hard to come by these days.

As I outlined in Money Post on May 7 ('As floats sink slowly in the East'), much of this is a result of the decline in the number of IPOs by Chinese state-backed companies. They accounted for 77 per cent of new listings by volume in Hong Kong at their peak in 2006, but so far this year they make up a little more than 26 per cent of Hong Kong's new listings.

By contrast, IPO issuance by private companies from the mainland is on the rise. Such entities raised just US$231 million in 2000 in new listings in Hong Kong, but, by 2010, they floated shares representing a record US$21 billion. So far this year, private Chinese firms have raised double the amount of IPOs by state-owned firms. However, the trend towards private issuers also means deal sizes are dropping. Gone are the days of the mega-floats of state-backed leviathans, such as Agricultural Bank of China's 2010 IPO, which raised US$22.1 billion, or Industrial & Commercial Bank of China's, which had a US$21.9 billion listing in 2006.

Although a record deal volume occurred from large issuers (that is, by firms raising more than US$1 billion) in 2010, the trend towards smaller deals is having an impact on banks' fees this year. Nine out of the top 10 investment banks have raked in less than US$100 million in equity fees at the mid-year post for Asia outside Japan, and total industry fees for the region were down 44 per cent compared with the first half of last year.

So, no traffic jam at the Ferrari dealer this year, then.

Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)