IPO-puffing PE firms may end up with much to regret
By Paul Mackintosh - 01/06/12
Thanks to Facebook, and its backers, IPOs have been on the receiving end of a press pummelling lately. The unfolding story of greed, vaunting ambition and plain missteps continues to mushroom, as the world’s third biggest IPO ever is increasingly being described also as one of the worst ever. And the IPO market elsewhere is hardly glittering, with macro concerns over the European debt crisis spilling over into poor appetite across bourses.
But none of this will stop some IPO candidates’ trying to defy gravity – and now, it seems, with the help of private equity funds. The world’s biggest IPO of 2012 up until the end of April was the flotation of Haitong Securities, China’s second largest brokerage, raising US$1.68 billion according to Reuters. And, again according to Reuters, Haitong secured around $580 million in pre-IPO investment from 11 cornerstone investors, including private equity (PE) firm Pacific Alliance Group (PAG), led by former TPG Capital China supremo Weijian Shan, and PE/hedge fund crossover alternative investor DE Shaw. PAG alone contributed some $300 million, Reuters said. This followed Haitong’s failed attempt to list in November 2011, which foundered in the storm of macro uncertainty, but which also had PE cornerstone involvement – that time from Warburg Pincus. And PRC state-owned insurer PICC Group is now launching a $6 billion IPO with 17 bookrunners, adjusting their participation according to the amount of cornerstone or other capital they can bring in to the float.
Pre-IPO investments, obviously with a guaranteed allotment and usually with a discount or other favourable terms, have long been a staple of Asian private equity, especially in Greater China. They provide a relatively easy and low-risk way for funds to put money to work. And PAG shows how far PE funds can push their role in the current feverishly competitive IPO advisory market. International Financing Review noted that a syndicate led by ICBC International, a bookrunner on the Haitong float, loaned PAG $150 million to support its cornerstone commitment.
This is easy money for PE firms, offsetting the tight money at home that is driving many major PRC enterprises to raise capital in the IPO market. But it defies logic in terms of timing your listing. The Haitong IPO priced at the bottom of its indicative range. Research firm Dealogic now cites cornerstone capital as contributing around 30% of the total value of IPOs in Hong Kong so far this year – and Hong Kong is now the world’s biggest IPO venue by far. Chinese companies may be able to take advantage of their own and international banks’ eagerness for a cut of the IPO action, but the whole situation feels like one that could come unstuck. Banks and even PE firms that get drawn into this IPO-puffing may end up with as much to regret as Morgan Stanley apparently does now with Facebook.