HONG KONG: Hong Kong has a deepening love affair with a system that allows major institutions or rich individuals to buy stakes in IPOs before the companies´ sell shares to the public but it may be undermining the vibrancy of the city´s stock market.
The Chinese territory, the world´s biggest initial public offering venue, has been unique in the way it has used so-called cornerstone investors, who agree not to sell the stakes they acquire in the IPO within a specified "lock-up" period, to a much greater extent than any other major market.
The Hong Kong system has often been held up as one that bolsters confidence.
It signals that big investors and the smart money are committed to the company doing the IPO, and they aren´t going to bail out as soon as the shares start trading.
But now, the cornerstone investors are taking up such a large percentage of the IPOs that there is little left for other investors, hurting liquidity once the shares start trading.
The cornerstone money also becomes an overhang over the stock as the expiration of the lock-up period nears, and there are wider fears that the system is one of many signs that the market is losing its mojo.
Average daily turnover in the first five months of the year totalled HK$68.8 billion ($8.87 billion), down nearly 44 percent from the same period in 2015, while the benchmark Hang Seng index has tumbled about 27 percent in the past 14 months.
"Large cornerstone tranches create issues in terms of after market liquidity and share overhang, nearer the time of expiry of the lock-up," said Philippe Espinasse, a former banker at UBS and Nomura.
China Development Bank Financial Leasing Co is the biggest poster child yet for the trend.
The leasing unit of China´s state-owned development bank has already pre-sold between 68 percent and 78 percent of its IPO, which could raise as much as $1.13 billion.
That means it is set to take the questionable honour of having the Hong Kong listing with the biggest-ever percentage level of cornerstone investment. The IPO itself is pricing on June 30 and the shares are due to start trading July 11.
