These days, IPOs are less of a public offering and more of a cornerstone investor recruitment process. Cornerstones have become essential to a successful listing.
Their involvement, through which a handful of investors subscribe to a large part of the offer before formal marketing, considerably cuts the risk of a failed transaction. It also provides a high degree of confidence to other institutions - and to retail investors - to subscribe to a deal that's already been taken up by big, visible names.
But picture the following scene. More than a dozen investment banks are being summoned to Shanghai or Beijing by a firm that is eager to achieve a listing on the Hong Kong stock exchange. The issuer is of a reasonable size - so it's likely its IPO will bring substantial, much-needed fees to those firms that can land a role on the deal.
The banks have already submitted multiple pitches and have had to agree to all sorts of requests (some of which, frankly, are unreasonable) for co-operation with the company after its listing. Now comes the coup de gr?ce: they will each have not more than two weeks to bring in one or more cornerstone investors to the transaction, failing which they will be relegated to a junior role in the deal, or worse, kicked out altogether.
So there you have it. A large group of houses eager for IPO riches comb the market to try to find investors ready to each subscribe (at short notice) for allocations in the tens of millions of dollars, or higher, a stake they will be required to hold on to for a minimum of six months.
The banks are in fierce competition at this stage so there is no co-ordination whatsoever on the cornerstone quest. Sovereign wealth funds and portfolio managers from New York to Singapore are receiving multiple calls. Each time the investing story is a little bit different, be it the valuation, the issuer's prospects, or other messages.
There is probably a better way to manage the process. Investors get annoyed, as no one appears to be in control. More often than not, the final cornerstone group will include corporations, suppliers or entities related to the issuer rather than bona fide institutional investors.