Buy your favourite stars' perfume, not their share tips
The celebrity cornerstone investor offers no guarantee that a company making an IPO will go on to be a stock market success story
According to National Geographic's latest weekly series The '80s, the 1980s was a decade of such importance that its cultural shifts and innovations continue to underpin everything we see today. Gordon Gekko said "Greed is good," Madonna sang Like a Virgin, and celebrities and sports stars started selling everything from underwear and perfume to cars. A mix of celebrity-ism and sales has proven to be a powerful combination, and it only took Wall Street bankers a nanosecond to work this out.
Fast-forward to today in Hong Kong, and with the IPO market gradually rumbling back to life, we all know what to expect: yet many of us cannot resist the urge to buy, because the cornerstone investor is famous investor X, or astute investor Y, or tycoon Z.
It reminds me of investors who pile into a hedge or private equity fund with minimal due diligence, because a reputable institutional investor has backed the investment. After all, can't we rely on the hard work they have done to vet it? I mean, what famous person or reputable investor would risk their reputation to support a dog?
Before I take a stab at answering these questions, it is interesting that some celebrities have cut out the marketing and banking middle-men to launch their own investment products. Their success has proven that celebrity-ism's grip on investors' imagination and emotions can be iron-clad, thereby providing more research fodder for behavioural finance academics.
Returning to the questions above, investors must realise that there might be any number of reasons why a tycoon or famous investor backs a particular IPO. For example, does the investor or her affiliates have other business with any affiliates of the company? Does the investor want something from the company or its affiliates, such as similar backing somewhere down the road? Or is it payback for what the company or its affiliates did to support the investor some time ago? In some situations, famous investors backing a deal might get special terms that ordinary investors might not get.
On the surface, a six-month lock-up for a cornerstone investor might sound like a good deal, because smaller investors know they can unload IPO shares by flipping them back to the market immediately or soon after an IPO without worrying about shares getting dumped by the cornerstone investors. With IPOs in Hong Kong having a mixed performance record, and subject to the overall mood of the market, as with all equity investments, they should be considered a three-to-five-year buy-and-hold proposition. Accordingly it makes little sense to rely on a six-month hold period by management and cornerstone investors.
Furthermore, management and cornerstone investors should have a long-term investment horizon in the IPO: in management's case, it's their business, after all, and the significant wealth of cornerstone investors implies that their investment horizon should be measured in decades, not months.
If these cautions are not enough to convince you of the fallacy of investing blindly alongside famous cornerstone investors, ask these questions: what does this famous investor know about this company and its sector? Does this celebrity have a long history in this sector and with this management? Is there another listed company in this same sector that we would be better off owning? Should we wait and give this company time to develop a record as a listed company before we take the plunge? Have we done adequate homework to justify this investment?
Celebrity-watching is great on the TV and doesn't involve parting with your hard-earned capital. But if you must part with cash burning a hole in your pocket, there are much cheaper ways to engage in celebrity-ism, starting with purchasing your favourite stars' branded underwear and perfume. Stay away from the star-studded IPOs, unless you've done your homework.
Robert Jones is head of FCL Advisory, which advises family offices and wealthy individuals