IPO Preview: PICC and the Powl
Amid tense Sino-Japanese relations, the US$3.1 billion initial public offering of mainland insurer PICC Group is all the more remarkable in that it included a rare tranche solely targeted at Japanese investors.
While the exact allocation hasn't been disclosed, the equivalent of US$220 million is thought to have been allotted to them, the offer also said to have been well subscribed.
It's not unusual for multibillion-dollar IPOs in Hong Kong to include a so-called Japanese public offering without listing (Powl) - although the last sizeable ones probably date to the mega-deals of 2010, the flotations of Agricultural Bank of China and of fellow insurer AIA.
In the case of PICC, an industry sector that's well-represented in Japan, and the presence of Japanese insurer Tokio Marine as a US$50 million cornerstone investor, may have encouraged participation.
As the name suggests, a Powl is a mechanism that's used to gather demand from Japanese public investors, but without the added complexity of listing shares in Tokyo. And as is common with equity offerings there, orders are principally derived from retail and individuals with high net worth, rather than from institutions.
The process, however, somewhat lengthens the overall timetable for a deal and adds to the cost of an IPO. Documentation has to be filed in Japanese (not just at the time of the offering, but on an ongoing basis thereafter), and local auditors also must do work on the financials.
Importantly, and unlike public offers in Hong Kong, Powls are conducted only after the final offer price has been determined. That, for example, explains the unusually long wait for the start of trading in PICC Group's shares - December 7, following pricing on November 30.
The Japanese broker (or, more rarely, brokers) will usually have a good feel for what the book might be before launch (and, indeed, will secure their allocation on that basis), but the reality is that demand under a Powl is largely gathered only after the battle has been won and the deal has been priced.
While it certainly helps to diversify avenues of demand for the shares, as billions of dollars worth of additional orders can be gathered in just a few days, how much a Powl is really able to help create tension between classes of investors during the earlier book-building phase of an IPO is fairly academic.
Many issuers struggling to get their deals across the line see Japanese investors as a welcome form of insurance that their offer will be covered. But to be big in Japan, one must first be big in Hong Kong. Powl orders typically come when a deal least needs the demand.
Indeed, the catch is that the device really works for only large, liquid, visible and attractive IPOs. In many cases, Japanese brokers are unlikely to risk burning their investor base with a transaction that doesn't tick all the right boxes, or faces a reasonable chance of tanking in the aftermarket.
Because it's pretty much a one-way bet, Powl investors have hardly lost any money in the past decade.
Generally speaking, the presence of a Powl can be a sign of IPO quality. The problem is, it's not always obvious to Hong Kong retail investors that a deal includes a Powl. (You won't find any details of it in the public offering document, for example.)
Despite an encouraging start of trading in PICC shares, the rather subdued response from international institutions to that deal, and an uninspiring pipeline of new listings (some of which have been on the pad for many months), could ultimately make Japanese investors perhaps take an even more conservative and cautious approach to Chinese offerings.
Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)