It might be called an initial public offering, but a so called friends and family listing is usually anything but public.
Unlike normal transactions, where final pricing is derived after a one to two week bookbuilding process, the ballpark IPO price for friends and family deals is typically agreed in advance between the issuer and its wealthy buddies.
One deal that is looking to rely heavily on friends and family is Chinese property developer Sunshine 100’s $300m Hong Kong IPO, which is set to open books on Wednesday. The Chinese property market has fallen heavily out of favour with investors in recent times, as a result of industry instability thanks to an oversupply of houses, a tightening of bank loans and shifting government policies.
A conventional deal would be highly unlikely to work well in such trying times, so a successful IPO can only be pushed through if the issuer manages to garner a substantial amount of anchor orders, which is the model Sunshine 100 has adopted.
But a friends and family deal is not always the simple solution that it might appear to be. Getting your friends right is the key.
Such deals tend to have pretty decent secondary performances, as they are usually fixed at investor-friendly prices. In addition, since the anchors are usually closely associated with the issuer, they would be expected not to flip their allocation, adding to the stability of the stock.
That’s the hope, but of course there’s nothing actually requiring anchors to behave like that. It’s different for cornerstone investors, who are obliged to agree to a lock-up period. If a friend does decide to sell, it can be very unhelpful for the issuer — much worse, in fact, than if someone unconnected was to flip it.
Some recent deals are trading well underwater. China Everbright Bank, which raised HK$24.9bn last December in a deal that was mostly taken up by Chinese corporates — very much friends and family — was trading at HK$2.98 on February 25, down 25% from its IPO price. Similarly, Bank of Chongqing, another small to mid-size Chinese lender, saw its shares drop 17.5% from its IPO price to HK$4.95. It had raised HK$4.34bn last October in a deal that was also mostly taken up by Chinese corporates.
When good is bad
Secondary performance aside, allocation can also be tricky — particularly when investor sentiment changes during the course of a deal. Friends and family structures are typically chosen when issuers are worried about appetite for their stock, but if the broader market suddenly likes the look of a story once the process has been started, issuers have to decide whether to squeeze the anchors or shut out institutional investors.
Neither option is attractive. The good friends will probably take less offence if they get less than they bargained for. The reaction of a bad friend is easy to guess. And if an issuer decides to allocate fewer shares to broader institutions that committed during bookbuilding, it runs the risk of losing high-quality investors.
So what do issuers gain from the process? Certainty of execution is about the only reliable result. What happens after that is rarely in their control, particularly if they have not done enough due diligence on their nearest and dearest. Winning friends can be easy: influencing them is the real trick.