What a difference a few years can make. Initial public offering volumes are sharply down in Hong Kong, while some markets in Southeast Asia appear to be enjoying a revival not seen since the 1997 financial crisis.
I mentioned earlier in Money Post ('Russian IPO fizzle shows limit of HK global plan' on July 2) that much of this is due, at least in part, to the shrinkage of deal flow from China's giant state-owned enterprises. That flow has generated much of the steady fee income for IPO bankers since the mid-noughties.
However, not only have IPOs in Hong Kong become fewer and smaller, but their quality has, on average, arguably also headed south.
There are several reasons for this.
A small deal requires as much work as a large one, if not more, but obviously for a smaller commission pool. This, together with fee erosion driven by low supply, has translated into a drop in the quality of bankers handling the deals. Simply put, they can lack experience, leading to failures to spot the issuers' shortcomings. And even when these are known, they may lack the ability to communicate these facts to investors in a way that informs but keeps the deal together. In other words, if you pay peanuts, you get monkeys.
With the supply of IPOs drying up, banks have also been forced to chase deals they wouldn't have considered before. When I was an IPO banker in the early 1990s, the firm's underwriting committee would not touch any flotation bringing in fees of less than US$2 million. Few banks today can afford to be so sniffy.
Instead, bankers are going for a brutally pragmatic approach of bringing pretty much any deal to market, regardless of its flaws, and move on to the next if it fails. Greed and opportunism have taken over from impartial advice and putting clients' interests first.