Asian IPOs are being undermined from the inside

Just 2% of a big Asian IPO has been allocated with institutional accounts. The vast bulk of the deal went to cornerstone investors, which are quickly becoming the dominant force in listings. As a result, the IPO process is in danger of being undermined.

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.

BTS’s $2.1 billion 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 $48 million 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 $850 million. Another $696 million was set aside for BTS as the sponsor, and the retail tranche made up the remaining $502 million.

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 soothe 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.

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