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PICC: a big, but not bold, end to the year

Chinese insurance group PICC raised HK$21.01bn ($3.09bn) in Hong Kong’s biggest IPO of the year last week. The sheer size of the deal means ECM bankers can end the year with some pride, but this is not a feat that can be often repeated. True bookbuilds, not club deals, will be needed to resuscitate the market in 2013.

ECM bankers have suffered badly this year thanks to the low volumes of Hong Kong IPOs, a key source of revenues in the region. Banks’ revenues have not just been hurt by the reduced flows, but also by the increased competition, which has made syndicate lists increasingly crowded.

These exhaustive bookrunner lists mean the power to really run a deal — a power that cannot be shared between more than a few banks — ends up held in the hands of precisely no-one. PICC’s listing was a classic example of this, and a banker familiar it said that it was only the company’s contacts that helped close what he called effectively a “club deal”.

This is not a direction anyone, besides a few well-connected firms, wants the Hong Kong IPO market to go in. The special administrative region has yet to see an IPO really thrive based on real demand this year, but this is what is needed to convince companies they can come back to the market in large numbers, and convince banks to take a punt on launching more deals.

 

Friends, countrymen

Many ECM bankers would agree that most Chinese companies successfully tapping the Hong Kong IPO market this year have done so by calling in what are widely known as “friends and family” to place orders and get the deals off the line. This could include similar companies with which the issuers have strategic relationships, or high net worth “friends” looking for new investments.

Finding demand for a Hong Kong IPO has become more a matter of who you know, not what you do or what value you can offer. This is an understandable turn of events in a difficult year. Friends and family allocations give banks and companies extra security.

But in the process, bankers lose sight of where the real demand is and how much capacity is left to serve this demand. That can only hinder their ability to follow up with other deals. Perhaps more importantly in the long run, it makes it harder for bankers to come up with real evidence that a company’s pricing expectations are out of sync with reality.

No-one can blame bankers for joining crowded syndicates and getting a league table boost — as well as a slither of revenue — where and when they can. But as much as PICC’s listing was a nice way to end the year, that kind of deal would not be a fruitful way to start the next one.

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