Readers of this column will be familiar with my occasional ranting about Hong Kong’s cornerstone investor regime, and in particular the doltish six-month lock-up rule which the Singapore Exchange, for one, never saw fit to introduce, and which even Bursa Malaysia ended up ditching, after having initially restricted it to subscriptions representing 5% or more of a company’s share capital.
Although we’ll probably need to wait a few more days for the details, we’ve already been told that cornerstone investors will likely account for around $6bn of Postal Savings Bank of China (PSBC)’s $8bn to $10bn IPO, including an individual subscription for $2bn by China Shipbuilding Industry Corp. (CSIC).
This would, I believe, make it the largest individual cornerstone subscription in Hong Kong since Qatar Investment Authority (QIA)’s $2.8bn ticket in Agricultural Bank of China (ABC)’s $22.1bn Hong Kong and Shanghai IPO in 2010—and probably the largest cornerstone investment in Hong Kong by a corporate, rather than a bona fide institutional account.
At least QIA’s stake in ABC had a strategic tint to it, and the parties had simultaneously committed to a non-binding MoU, which “set out the principles upon which the parties wished to develop and strengthen their strategic economic co-operation”. ABC had also entered into similar sets of key principles with Archer-Daniels-Midland, Rabobank, Standard Chartered Bank and Seven Group, all of which were part of the cornerstone group at the time.
The link between PSBC and what is effectively a group of enterprises specialising in manufacturing and repair of marine equipment is much more tenuous, even if China Shipbuilding Capital, the overseas financing and investment platform of CSIC, engages in financial leasing, among other activities.
This year, cornerstone investors in Hong Kong IPOs of $500m-equivalent or more subscribed for, on average, 61% of these offerings (pre-over-allotment option), the proportion even reaching an astonishing 78.7% in the IPO of China Development Bank Financial Leasing last June (much of which was due to a single subscription by Three Gorges Capital). At the bottom end of the range, the proportion to taken by cornerstones in PSBC’s deal would not trail far behind it.
This poses obvious questions about aftermarket liquidity, even if we’re still talking of a free float, excluding the locked-up portion, of perhaps $2bn. After all, cornerstones in the $10bn LSE/HKEx IPO of Swiss commodities broker Glencore in 2011, a deal of comparable size, only accounted for just over a third of the transaction.
More importantly, these included eye-catching names such as the investment arm of the Abu Dhabi government, Aabar Investments, BlackRock and Singapore’s GIC, which have been noticeably absent as cornerstones in Hong Kong IPOs in recent months (and even years).
In fact, there have only been a handful of international (i.e. non-Chinese) institutional names coming in as cornerstones in Hong Kong this year, including Prudential Insurance of the US (in the IPO of Everbright Securities), Value Partners (in the flotation of DFZQ) and Oman Investment Fund and Fullerton (both in BOC Aviation’s offering) —out of a grand total of no fewer than 61 cornerstones investors. Yes, that’s only just over 6.5%.
Initially, cornerstones were included, not just to de-risk these capital markets offerings, but also to provide momentum at an early stage of bookbuilding, and encourage a wider group of investors to participate. In 2011, I even went as far as suggesting on the website of the Wall Street Journal that their very involvement often contributed to creating sought-after offerings.
These days, however, it seems to be ever more a case of harnessing demand that would otherwise be impossible to find elsewhere, with shares simply being parked with large SOEs and corporates, with few questions asked (especially about valuation).
It’s not the first time such a device has been employed. For those old enough to remember, in the late 1980s, French bureaucrats introduced the so-called “noyaux durs”, or reference shareholders, in the mass privatisations of the time, to ensure that a significant portion of IPOs of businesses often seen essential to the national economy went to what were, essentially, friendly shareholders.
Incidentally, noyaux durs means “hard fruit stones”. Buyers beware: these can be hard to swallow.
Philippe Espinasse was a capital markets banker for almost 20 years and is now an independent consultant in Hong Kong. He is the author of “IPO: A Global Guide”, “IPO Banks: Pitch, Selection and Mandate”, and of the Hong Kong thrillers “Hard Underwriting” and “The Traveler”.