Cornerstone investors have become the key to getting any IPO off the ground in Asia, but the recent listing of BTS Rail Mass Transit Growth Infrastructure suggests that the reliance on this small group of investors may have gone too far. Just 2% of the deal ended up with institutional accounts.
BTS’s $2.1bn deal is the biggest IPO in Asia so far this year — and the second biggest in the world. But institutional investors that did not come in for the cornerstone tranche were only able to get their hands on $48m-worth of shares. With this allocation going to around 200 accounts, it’s safe to say that nobody got want they wanted. And even more were left out in the cold.
Cornerstones dominated the deal, pledging to take $850m. Another $696m was set aside for BTS as the sponsor, and the retail tranche made up the remaining $502m.
Bankers on the deal are in a bind, stuck between wanting to celebrate the completion of the deal while at the same time trying to sooth their bruised buy-side clients. With BTS's institutional investors holding such a tiny amount, this is hardly going to be a liquid, freely traded stock.
Who's to blame?
It’s easy to make dealers the scapegoats for this phenomenon. In part, it is their keenness to get as much of deal covered before they go out on the road that is driving such large cornerstone tranches. Nobody likes failure. If your book is covered before you do your first investor meeting, you can sleep soundly without nervously eyeing your P&L.
Institutional investors might be expected to conclude that if they can't — or won't — get into a deal ahead of the roadshow, they might as well not bother at all.
Perversely, the opposite is true. The lemming-like nature of investors means that the bigger the cornerstone tranche, the more likely they are to participate — thus encouraging deal sponsors to seek yet more cornerstones.
If investors actually bought into IPOs because they liked a company's fundamentals — rather than because a deal was guaranteed to be a success — it could weaken the power of the cornerstone process. But for now, investors’ need to have a full order book before committing is undermining their ability to get the allocation they want.
The process would seem to be a win-win for issuers, at least. They get away a successful capital raising and six months down the line, when the lock-in expires, they are pretty much assured of seeing strong demand for any follow-on offer as investors jump on the opportunity to get extra exposure — and create a more liquid market.
But this undermines what an IPO should be about. As well as raising capital for the business, a public listing is intended to allow companies to widen their investor base. A liquid secondary market is desirable, resulting in a transparent market valuation — and that requires institutional involvement, not just retail.
Even in widely distributed offerings, the reality is that pricing power often lies in the hands of a fairly small percentage of the final book. But if a tiny group of investors is not only able to determine pricing but also swallow up the majority of the stock on offer, there is precious little that is public about an IPO. Initial Private Offerings, anyone?