Asia: Why Hong Kong needs to curb cornerstone epidemic
The dominance of cornerstone tranches in Chinese IPOs represents a raw deal for other investors – and needs to stop.
Hong Kong: far too many cornerstones
There was a time when a cornerstone investor was a foundation upon which to build: a stable starting point, an illustration of commitment and a stamp of approval.
When Sinopharm Group came to the Hong Kong market in 2009, for example, it rounded up nine cornerstone investors, committed them to a six-month lock-up, and offered them up to 20% of the shares on offer – the maximum at the time.
They were significant, but a side dish to the main course of retail and institutional demand.
Now, it’s the retail investors who look like the aside. Our report on Postal Savings Bank of China’s (PSBC) IPO focuses on its ludicrous 26 bookrunners, but what’s just as significant is the fact that almost 80% of its $7.4 billion raising went to cornerstones.
This is the culmination of a problematic trend that kicked off with the Agricultural Bank of China, which placed $5.5 billion of its $22.1 billion IPO to cornerstones in 2010. The percentages have steadily increased, with more than 40% of IPO equity in Hong Kong last year being locked up in this way.
The PSBC IPO took the figure to well over half so far this year, according to Dealogic; 78% of the IPO of China Development Bank’s leasing arm went to cornerstones; more than half of each of China Huarong, China Reinsurance and BOC Aviation went the same way. None-cornerstones, absurdly, are now a minority.
This has to stop, because other investors are being penalized. The scope for mispricing is enormous. It’s not as if these cornerstones are all global institutional investors who might play a useful role in price discovery.
One of the biggest names in the PSBC IPO is China Shipbuilding Industry Corporation, which will end up with almost $2 billion of stock. What on earth is that about? It means there are vast overhangs that might reappear and hit other investors once the six-month lock-ups expire, and it means weak liquidity in the meantime.
It also means that some of the biggest listed companies in the region are still, to a very large extent, state-controlled while nominally trading freely on international public markets.
It’s one thing to prop up an IPO with friendly state-backed faces to get it started, but the latest offerings show cornerstones becoming almost the entirety of the deal, defeating the idea of going public in the first place.
They create distortions, too, as it is only through cornerstones that the bank was able to meet a Chinese government rule that state banks can’t be sold at less than their book value; without the cornerstones, that couldn’t have happened, and other investors would have paid a fairer and less distorted price.
Everyone knows Hong Kong’s future as a listing venue depends on China’s heavyweights continuing to want to come here, but it is time for the regulators to step up and impose some sense. Cornerstones need to be back in the corners, not covering the whole of the floor.