In the stuttering Hong Kong IPO market, cornerstone investors have been cast in the role of saviour. Without them, even the handful of deals that have come to market in recent months would, in all likelihood, have been shelved.
But concerns abound over what their presence does to the economics and credibility of the public equity market.
In the most recent example, Peoples Insurance Company of China (PICC), one of the countrys largest insurers, has attracted $1.85 billion from cornerstone investors for its proposed $3.6 billion initial public offering in Hong Kong. It is an unusually large proportion of an IPO to be allocated to cornerstones, which between them typically take somewhere between 10% and 20% of shares on offer.
Cornerstone investors are guaranteed access to a companys IPO within the initial price range but have to agree to a lock-up period, generally of about six months, during which they cannot sell their shares.
In an Asian ECM market that has struggled to build any momentum, particularly in Hong Kong, cornerstone investors provide a degree of safety for companies hoping to float as concerns over market volatility loom large. Good-quality cornerstone investors can convince other potential investors that a stock is a good buy. At the same time, though, their presence can betray a lack of confidence at the company and among its advisers about the trading prospects of the stock. Among other criticisms that have been voiced about cornerstones is that they hinder a company after its IPO because liquidity suffers from the number of shares that are locked up. And other investors can sometimes feel like second-class citizens because of the preferential treatment given to cornerstones.
In the case of PICC, the list of cornerstones is undoubtedly impressive. AIG is the top backer, with a $500 million allocation that is also part of a wider agreement between AIG and PICC that will involve the US insurer selling life insurance in China. It is a move that brings it closer to its roots in the country where its predecessor firm started business almost a century ago.
Among the total of 17 cornerstones for the PICC deal are State Grid, with $300 million; Sinomach, with $150 million; Munsun AM, with $140 million; and China Life, with $100 million. In keeping with another recent trend in the Hong Kong IPO market, PICC has also employed a large number of bookrunners. At last count, some 17 banks were involved, exactly matching the number of cornerstone investors in what might or might not be a coincidence. The much-anticipated offering has already been revised down from its initial target valuation and IPO size, according to sources close to the deal.
Several other recent IPOs in Asia have relied heavily on cornerstones. Huadian Fuxin Energy Corp raised $319 million in its Hong Kong IPO, 60% of which came from six cornerstone investors. Sunshine Oilsands IPO also had 60% of its IPO covered by mainland China cornerstone investors, including Sinopec and China Investment Corporation.
The trend is not confined to Hong Kong. The Malaysian IPO of Felda Global Venture was partly covered by 10 cornerstone investors for a combined $1 billion, a third of the total it was seeking to raise.
Although they are an established feature of Asian IPOs, cornerstones have featured only sporadically elsewhere. On Glencores bumper IPO, 12 cornerstone investors, including a mix of sovereign wealth funds from Asia and the Middle East along with asset managers, hedge funds and private banks, committed themselves to $3.1 billion-worth of shares.
Same information, but in advance
According to a recent report from law firm Clifford Chance, potential cornerstone investors are generally contacted a few weeks before the roadshow and agree to become insiders and sign confidentiality agreements in exchange for receiving near final drafts or advanced copies of the preliminary prospectus. They will often also be given an opportunity to meet and talk with the IPO companys management. They will not be provided with any information beyond that which is to be contained in the prospectus and, ultimately, all of the IPO investors will receive the same information, according to the report.
The report adds that the allotment of shares to cornerstone investors will be guaranteed in the subscription agreement that they enter into. The only matter to be determined after signing the subscription agreement is the final offer price used for the calculation of the number of shares the cornerstone investor is to receive.
Hopes are high that the PICC deal will at last provide the spark that ignites the wider Hong Kong IPO market. So far this year, several multibillion dollar deals have been cancelled or postponed at the last minute amid worries about investor appetite and market volatility.