The market conditions of 2011, fraught with dangers ranging from the European sovereign debt crisis, the downgrade of the US and worries over growth prospects in China, have forced bankers looking to close IPOs in Asia to change their tactics.
IPO volumes in the region reached about $81bn in 2011, just under half the previous year. And as in ECM transactions elsewhere in the world, reducing a deals exposure to market volatility has been the key to success.
One strategy Asia ECM bankers adopted last year was front-loading: quietly building up as much interest in a deal before launching and making the public part of the flotation process quicker by shortening the formal marketing periods. That makes sense when the secondary market is fickle: for much of the year bankers and issuers did not have enough trust in the market to risk letting deals gather momentum without any real visibility of demand ahead of time.
"Last year you could not play chicken with the market," says Sam Kendall, head of ECM Asia ex-Japan for UBS. "In 2011, there was a more challenging market than during the financial crisis, because it did not feel as if the world was ending. Instead it pushed along painfully and as a result issuers and bankers needed to be much more thoughtful to succeed."
In that context, being pragmatic about deal execution was essential, argues Kendall. "If you adopted a new strategy of building early momentum through more meetings with investors upfront; if you were willing to pull away from a deal that was not working; and if you were able to re-calibrate your valuations to realistic levels for the time, then you could get deals done."
Others agree with that analysis, adding that the picture is a similar one for 2012. "A lot more front-loading work was needed last year," says Niccolo Manno, an ECM syndicate banker at Deutsche Bank. "We interacted with investors way ahead of launching deals, effectively educating for longer and gauging interest to see if there was a deal that would work. Then the actual roadshow and bookbuilding process was a lot shorter.
"In volatile markets you cannot afford a month and a half on the road. It was just too risky. Companies will have to continue on this track in 2012."
Issuers also reacted to this new environment by loading their syndicates with as many banks as possible, improving their chances of appealing to big cornerstone or anchor investors. This may have smoothed their way to the market, but with the fee pot being spread ever more thinly, the strategy finds few friends among bankers.
Better, then worse
The year had started out promisingly, with a better first half than the same period in 2010 for Asian ECM bankers. But when markets tumbled in the third quarter, it became clear that this would not last. Investors paid increasing attention to worrying headlines as Europe and the US came under scrutiny. Bankers would arrive at their desks each day fearing the aftermath of what had emerged the night before on the other side of the world.
"Macro factors changed so quickly that investor feedback at the beginning of a deal was often unreliable by the end," says Steven Barg, co-head of ECM for Asia ex-Japan at Goldman Sachs. "Orders of $100m at launch could diminish dramatically to a fraction of their original size, and investors were quick to change their minds about participating at all."
China Outfitters, Beijing Jingneng Clean Energy, Xing Yuan Power Holdings, CT Environment Group and Hosa International were all forced to scrap planned IPOs in June, and in total 16 listings were postponed or cancelled in Hong Kong throughout 2011.
Six of these successfully returned later in the year, however, and not all IPOs struggled to find demand. Some big names had managed to list before Junes watershed, although not always to great acclaim. The first renminbi IPO was priced by Hui Xian Reit, the real estate investment trust of Cheung Kong Holding, and Hutchison Whampoa raised $5bn from the spinoff of its ports business in Singapore.
But the poor performance of both of these IPOs at listing was blamed for weakening investor demand and sentiment towards renminbi deals and trust offerings both are still trading well below IPO price.
As the summer rolled on it was clear that IPOs would need to be structured with a safety-first approach if they were to succeed. Bankers did just that: covering books before launch with heavy anchor orders and committing a large number of cornerstone investors.
Sun Art Retail, for example, was "de-risked from the start", says Kendall at UBS: some 45% of the deal was allocated to cornerstone investors before launch. The company raised HK$8.2bn ($1.05bn) in mid-July, and won praise from rival bankers for its assured execution.
China Outfitters, one the companies that had postponed a deal in June, relaunched in December with more than 70% of the book covered by cornerstone investors.
It was not always possible to line up cornerstone investors, however, leaving deals vulnerable to volatility in secondary markets. Bankers then tried to build strong support from anchor investors accounts that are interested enough to place big orders but who make no commitment not to pull their orders. Some issuers were fortunate enough to do both.
Citic Securities IPO was another particularly successful example where bookrunners employed front-loading tactics. The leads managed to raise HK$12.97bn ($1.664bn) for the company despite the woeful market backdrop, lining up nearly half the deal in cornerstone commitments before launch and then finding anchor orders that roughly covered the rest of the book before launch. The shares did still fall on debut, but not calamitously.
Others fared worse in spite of having generated initial interest. Haitong Securities was forced to pull its HK$13bn ($1.67bn) IPO in December after early anchor orders from wealth management accounts disappeared in the final days of bookbuilding. Some bankers indicated this was an example of too many banks on a deal making promises at the start that they could not keep.
Too many cooks spoil the profit
Bankers say it is understandable that issuers want to bring as many banks into their syndicate as possible, but the strategy has caused problems for banks.
"The stark trend for growing cornerstone tranches is now pushing issuers to hire banks on their apparent abilities to bring in cornerstone demand," says John DAbo, head of ECM syndicate at RBS. "This is leading to the multiple bookrunner situations you are seeing on every deal these days. And at some point it becomes detrimental to have too many bookrunners on a deal."
Heavy syndicates threaten to make deals harder to execute communication and control of a transaction can quickly slip away. But they also make banks a lot less certain about the fees they are likely to earn, as they often dont know whether other banks will join the syndicate at a later stage.
"With fewer deals in 2011 than 2010, banks were more desperate to get on deals than before to try to get a piece of the pie or league table credit," says Alexis Adamcyzk, co-head of ECM, Asia Pacific, at HSBC. "But this can create the wrong behaviour from banks and also creates a level of uncertainty about what fees you will get until the last minute. It has definitely created an atmosphere of conditionality that was not so prevalent before in fee structures."
There were 12 deals with five or more bookrunners in Hong Kong over the course of 2011, compared with just 11 deals in the entire five years before, according to Dealogic.
Too much differing advice from banks is one of the negative impacts of a larger syndicate, as well as the increased execution challenges they present, suggests Will Smiley, co-head of ECM syndicate in Asia ex-Japan from Goldman Sachs. "Bigger syndicates can send mixed messages and instill a lack of confidence in a transaction," he says.
But any bankers hoping that this will prove to be a short-lived trend are likely to end up disappointed. Some believe that the competitive landscape is undergoing a permanent shift not least because of the emergence of new names in the market over the last few years, disappointed with the prospects in Europe and the US.
Unsurprisingly, the well-established houses in Asia are quick to suggest that the timing and the execution of such moves is wrong."Some banks made very little money last year because they pushed themselves on to as many deals as possible for no fee just to get league table credit and show management they were busy," says Kendall. "It is not sustainable."