HK awaits return of normal IPOs

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The market needs a high profile issuer looking to raise a lot of money

The pipeline for initial public offerings in Hong Kong is bursting, with up to $9 billion of deals ready to come to market. So it is something of a mystery why it is proving so difficult for deals to get done.

The equity market volatility that bankers have been citing as the reason not to do deals for the best part of two years has now abated and Hong Kong shares are expected to post solid double-digit gains by the end of the year.

But the scarcity of IPOs in Hong Kong is striking. Just two years ago, it was the world’s leading destination for stock market debuts.

But so far this year, Hong Kong is in eighth place globally, with a fifth of the volume of the New York Stock Exchange, the global market leader. In fact Hong Kong is also behind Tokyo, Frankfurt, Singapore, Nasdaq , the Mexican Stock Exchange and the Iraq Stock Exchange. On a happier note for equity bankers in Hong Kong, it is well ahead of London.

But the problem in Hong Kong is that very few will take the plunge. Those deals that have come to market have done so largely with the safety net provided by cornerstone investors. It is a situation where often multiple bookrunners essentially provide investors who are a sure thing in return for a role on the deal. It is akin to pay to play and takes some of the nervousness away. But cornerstones also provide an imperfect test of underlying investor appetite and until the size of that appetite becomes clear, companies are likely to continue to be shy of launching their offerings.

Sooner or later someone is going to have to get a normal IPO done without the safety of cornerstones. The company that does it will ideally be high profile. And it will be looking to raise a large sum of money, will price at the top end or above the range and enjoy a healthy first-day pop. That could well be the point at which the market decides that it is time to raise capital in the public equity markets. It will be a relief to all, in particular the bored equity capital markets bankers of the region, when this does happen.