IPO houses travel a rocky road bringing deals to Hong Kong market
Offer houses serve two clients on initial public offerings - corporate issuers and the investors - and it's hard do a perfect job for both
Every initial public offering banker likes to talk about how selective he is in choosing clients. They scour the corporate landscape looking for the best and most promising listing candidates, and then work with the issuer for months or even years, poring over their accounts, to ensure that they bring investors the best possible deals.
"We cannot hold a bank responsible because this is a free world. But if a bank always brings you lousy deals then the next time you will look at other deals instead," said Mona Chung, the chief investment officer at CIFM Asset Management.
Philip Li, a fund manager for Value Partners, said he was very aware that banks served two clients on any given listing - the corporate issuer doing the selling and the investors doing the buying - and that they could not do a perfect job for both. He suspects some banks are biased towards corporate issuers, because this is where they get most of their fees.
"There will be banks that tend to be more aggressive in looking after their corporate clients that are coming to market," Li said.
All of this should be reflected in the post-listing performance of an IPO. If a bank is too aggressive in looking after issuer interests, it will lead sub-standard firms to market, and price their deals expensively. All things being equal, this will translate into loss-making deals for investors.
To get a clear idea of the performance associated with the different banks bringing IPOs, the worked with Thomson Reuters to examine the post-listing performance of Hong Kong flotations brought about by the 10 largest IPO houses.
The analysis looks at the one-month and six-month returns of all floats brought by each bank over the past three years. Each bank's contribution for IPOs with multiple book-runners was stripped out, and the returns were weighted according to the size of each deal. Each bank was invited to scrutinise the data attributed to them, to verify results.
The data shows that investments were marginally profit making in the first month after an IPO. However, when the time frame is extended to six months, investors lost a combined HK$20 billion in the past three years.
The banks that led deals with the poorest six-month returns - Goldman Sachs, UBS, Deutsche Bank, HSBC, Morgan Stanley, JP Morgan, Credit Suisse and Citi - were heavily involved in a batch of problematic 2011 listings. These included the listings of Samsonite, Prada, Shanghai Pharmaceuticals and Chow Tai Fook Jewellery. All were large deals that performed badly over their first six months, losing investors a lot of money. Goldman Sachs was involved in all four.
But these did not look like bad floats when they were in the pipeline. They were the most prized mandates of the year. Arguably they were victims of the atrocious markets of 2011, when the euro-zone sovereign debt crisis was on full boil.
China International Credit Corp and Bank of China performed best in the survey. They were not involved in the four most problematic listings and led a lot of medium-capitalised mainland floats that performed relatively well.
Some of the best-performing offerings in the survey arrived late last year. They include China Cinda Asset Management, China Conch Venture, Kerry Logistics and Phoenix Healthcare. They buoyed banks' results for the one-month returns on the deals they led, but have not been trading long enough to affect the six-month averages. This explains why the one-month averages are better than the six-month averages, and points to a wider trend of an improving flotation market for Hong Kong.
Damien Brosnan, UBS' head of equity syndicate, Asia, says for the deals he leads he would like to see a 10 to 20 per cent price rise in the first few days of trading after an IPO.
"That's the sweet spot between making investors a reasonable return and providing the issuer what it wanted to achieve," he said.
However, beyond that one-month period, a deal's performance dissolves into the soup of market turbulence - banks cannot be reasonably expected to be accountable for price performance because after the over-allotment is spent, banks' price stabilisation role expires, Brosnan said.
"Asian markets are smaller and more volatile [than developed markets] and more subject to short-term news flow," he said. "As a result, the best performing IPOs in the first one or two months may not perform well in six months."
SNAKES AND LADDERS
The analysis looks at listings that priced in Hong Kong over the past three years. It examines the one-month and the six-month average share price gains or losses on these offers, broken down for each of the top 10 IPO banks by deal volume.
The data is weighted for deal size. Simply put, bigger deals have more impact on the average than smaller deals. This reflects the fact that investors will put more money into larger initial public offerings and that these deals need to have more weighting when tracking average returns.
The data describes the money investors would make or lose if they bought all the offerings brought by a given bank, over the past three years. For example, if an investor bought all the IPO shares marketed by CICC over the period, and sold these shares after one month, the total return would have been HK$1.1 billion. If the investor held those same shares for six months his gains would drop to HK$81 million.
Many bookrunners may be on a given IPO. We assume that each bookrunner has an equal role in a given deal and split the IPO proceeds evenly among all banks involved. This follows the rules used by Thomson Reuters to calculate league tables.
