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IPOs and cornerstones: better together

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By John Loh
12 Jul 2016

Asia’s infatuation with cornerstone investors is showing no signs of letting up, as issuers continue to hand over record amounts of stock in their IPOs. The practice has come in for some criticism, but the naysayers are short sighted. Cornerstone demand, for better or worse, is what the market needs right now.

Call it a necessary evil. Cornerstone investors have increasingly swallowed up ever larger stakes in deals throughout the region, and they accounted for a record 41% of new listings in Hong Kong last year. 

Hong Kong, as ever, is leading the way. Nine of the top 10 IPOs by size in the city over the past 12 months had at least half of their transactions allocated to cornerstone investors. That is a stark difference from five years ago, when cornerstone investors made up a mere 22% of new share sales, according to Dealogic.

Some consider this a bane, and there are obvious setbacks. The move hinders market pricing and gives pricing power to a select group of investors, which in the case of IPOs of Chinese state-owned firms are usually other Chinese state-owned firms. A good many of these floats end up as little more than club deals.

Trading volumes are also hurt by the locking up of a large amount of shares with several buyers. And when that lock-up expires, the expected sell-down becomes a drag on the stock. There is also the view that heavy cornerstone involvement exacerbates the poor liquidity in Asian shares.

There is merit to these claims. But in a year defined by low volumes and market shocks like China’s market meltdown and the UK’s vote to leave the European Union, the alternative is far less desirable.

Global equity capital market volumes tumbled 40% year-on-year in the first half of the year to $331.6bn. Asia Pacific too saw equity issuance fall 35% in the same period to $131.0bn, according to Dealogic.

Comfort for investors

In times like these, issuers and investors need a measure of comfort, and in spite of the trade-offs, the presence of cornerstone names will help to tide things over. It should be no coincidence then that cornerstone accounts have been taking up ever larger commitments recently.

For instance, while the rest of the world was reeling from the effects of Brexit, Asian issuers squeezed out $2.7bn in equity fundraising in the immediate aftermath of the vote result.

Orient Securities Co became the first IPO to price globally since Brexit, and even though it sold shares near the bottom of the marketing range, the HK$7.8bn ($1bn) it raised was impressive considering the circumstances. China Development Bank Financial Leasing Co, which made history with its 79% cornerstone allocation, also completed its HK$6.2bn listing that same week. Over in southeast Asia, Cemex Holdings Philippines’ listing fetched Ps21.9bn ($465m).

The common denominator for all these trades was the presence of cornerstone investors, and their role has not been so important since China triggered a months-long summer rout last year.

The reality is that cornerstone support is an inseparable part of ECM in Asia, so the trend is here to stay. There will be those who continue to call for a genuine market, but without the cornerstone factor there would be little market to speak of. Weaning issuers off the practice may be ideal, but it is not possible in the short term.

Certainly, those looking to take a pot-shot at the practice will have plenty of ammo if recent examples are anything to go by. BOC Aviation, the world's biggest aircraft lessor, has shed 8.3% of its value since its May IPO. CDB Leasing, which holds the cornerstone record, lost as much as much 7.5% on its debut on Monday.

Perhaps the ability of cornerstone investors to put a floor under share prices is diminished, or their power to inspire confidence is less than what it used to be. The halo effect of the cornerstone is waning.

But any issuer looking to seal the deal amid the current volatility will be hard pressed to find another way to do it, especially at their desired valuations. This is the time to be pragmatic.

Cornerstone investors may not be a catch-all solution to Asia’s problems, but there’s no need to look at them as millstones. In more challenging times, they can be a saving grace.

By John Loh
12 Jul 2016