Weak market and regulatory scrutiny unsettle bankers
With the equities business slow and appetite for new offerings poor, IPO advisers arebeing forced to diversify into other services
It is very difficult to be a banker these days, especially in managing initial public offerings, given the weak environment for share sales.
Banks have quietly complained about the political motivations of some regulators in the West to investigate financial institutions.
One upshot is that institutional clients in Asia have parked their funds in stable, cash-generating products while retail investors opted to create lots of churn by slipping in and out of equity positions and eschewing long-term holdings given how poorly regional markets have performed in the past three years.
Private wealth clients coveted by investment banks, on the other hand, have dumped their money in high-yield bonds that pay double-digit returns, even though many have little understanding of how interest rate changes would hurt their returns in fixed-income products.
"The equities business in Hong Kong has been slow this year, prompting the once deal-centric operating model to diversify into transactional services," a Hong Kong chief of a US bank told IPO Watch , adding that the current regulatory environment had propelled big banks to be run like public utilities.
In recent years, Hong Kong's listing market, for example, has failed to capture long-term investors who make their decisions based on underlying fundamentals. The tepid appetite for new share offerings forces white-shoe bankers to scramble for cornerstone investors, who are often friends and family investors with private agreements with the issuers.
Admittedly, cornerstone investors have grown in importance but they create an illusion of demand and hurt the brokers' commission business, partly because they are subject to a six-month lock-up following the listing.
The mechanism is undoubtedly a double-edged sword for banks. Besides assisting the flotation, they have little leverage or means to create liquidity, an important criterion for institutional investors before placing their bets.
Jittery market participants often react negatively when cornerstone investors announce they are selling their stakes, in part due to their relatively sizeable orders.
Given Alibaba Group Holding's decision to list in the US, sizeable listings in Hong Kong have been scarce. Most of the mainland's state-owned enterprises have gone public, sidelining the prolific bulwark of mega initial public offerings here over the past decade.
At one time, the most popular book was Small is Beautiful. Given how tough the game is these days, maybe it is time to go back to a traditional, modest business model for bankers to earn their keep.