HK IPOs grasp for cornerstone investors

Zhengzhou Coal Mining Machinery has enlisted nearly a dozen banks to hunt down investors willing to take stakes in the Chinese business ahead of its $1bn Hong Kong listing, an example of a worrying trend gripping the world’s biggest market for new listings.

Bankers say that this dash for so-called “cornerstone” investors has grown in importance as Chinese companies starved of credit at home seek to push their listings through Hong Kong’s stuttering markets.

Cornerstone investors, who get into a deal early, have accounted for a greater share of new money raised in Hong Kong so far this year than at any time before, according to data from Dealogic.

Such investors are guaranteed to receive the number of shares for which they bid in return for taking the price that emerges from normal marketing and promising not to sell any shares for six months.

Some bankers say the trend is not healthy. “It is no good for the joint global co-ordinators [lead banks], it is no good for the company, which can look desperate, and it is no good for the rest of the banks, who get paid very little if at all,” said one banker familiar with the Zhengzhou deal.

It might also be bad for the market, according to a Financial Times analysis of Dealogic’s data. Previous peak years for cornerstone involvement in new listings were followed by a big slump in stock prices – in 1997, 2000, 2007 and, most recently, in 2011, when Hong Kong saw its third year in a row of being the biggest market for new listings.

The number of Hong Kong deals with 30 per cent or more taken by cornerstone investors has also risen. Eight out of the 15 deals with the highest proportion of cornerstones have closed since the start of last year. Sunshine Oilsands, a Canadian company that listed in Hong Kong, set a record of almost 60 per cent of the shares on offer sold to cornerstone investors.

“It used to be that you didn’t give cornerstones more than 30 per cent of a deal because you would be worried about the liquidity of the stock, but now everyone is more concerned with just getting the deal done,” said another banker close to the Zhengzhou offering. “This trend is not healthy at all.”

Eight of the 15 top cornerstone deals have seen their share prices fall dramatically over their first six months of trading.

“In volatile markets, cornerstones are good for the security of a transaction,” said one. “If this level of involvement is a long-term trend then it would be worrying, but if in the short term we get back to lower levels, that is fine.”

Two other bankers involved with the Zhengzhou deal said such practices worked well when all the banks involved allowed the small number of lead banks to find investors. One pointed to last month’s share sale for Haitong Securities and to the July 2011 initial public offering for Sun Art Retail Group as deals that were well run.

Zhengzhou said it could not answer questions about the group’s financing plans.