Hong Kong's initial public offering boom has fundamentally transformed how companies allocate shares in their IPOs. According to reports from Bloomberg, companies are increasingly deciding themselves who gets a seat in their offerings, carving out room for strategic investors, business partners and other close allies - sometimes colloquially grouped together as 'friends and family'. This shift represents a stark contrast with years past when investment firms mostly competed with each other and relied on close ties with banks to win allocations. As Vikas Pershad, an Asia equities portfolio manager at M&G Investments, noted, 'One part of the process that has perhaps changed the most between the pre-Covid investing period and post-Covid is that the management teams very directly get involved in choosing their investors.'
The transformation comes as Hong Kong's IPO engine approaches record proceeds, with new listings delivering an average first-day gain of almost 30% this year. According to data compiled by Bloomberg, shares of more than 100 companies that debuted in Hong Kong this year have posted a weighted-average first-day gain of roughly 28%. One notable example is printed circuit board maker Victory Giant Technology Huizhou Co., which surged 50% on its first day in April after completing one of Hong Kong's biggest debuts this year. The company's chairman wanted to align the investor roster with its most prominent customer, Nvidia Corp., with more than 20% of the deal going to some of Nvidia's top shareholders.
Companies are now looking to reward business associates including suppliers and customers by allocating them shares in their IPOs that are likely to perform well in the current hot market. As reported by Bloomberg, in Zhongji Innolight Co.'s $7.8 billion listing - Hong Kong's biggest in seven years - only a small portion of shares went to 'friends and family' as institutional funds clamored for shares. However, the company was still heavily involved in the allocations after meeting investors beforehand to ensure they understood its business. In another example, more than a third of the nearly 300 institutional investors that placed bids in Lingyi iTech Guangdong Co.'s Hong Kong listing in June failed to get shares, with management teams closely involved in the allocations.
The trend has emerged at a time of heightened scrutiny by Hong Kong's market watchdog, with the Securities and Futures Commission broadening its regulatory oversight toward bookbuilding and share-allocation practices. According to Bloomberg, in July, the SFC ordered online brokerage Futu Holdings Ltd. to freeze assets of as much as HK$125.2 million ($16 million) that were tied to an entity suspected of creating a 'false or artificial appearance of demand' for IPOs. Tom Chau, president of the Hong Kong Chartered Governance Institute, warned that 'undisclosed allocations to friends and family would run the risk of treating investors unfairly, falsifying demand, propping up prices and hurting market confidence.'
While companies' penchant for picking investors doesn't imply wrongdoing, it's emerging at a time of heightened regulatory scrutiny. As reported by Bloomberg, there are signs that exuberance among investors may be fading, with more than half of Hong Kong's 10 biggest listings this year now in the red. Victory Giant's shares are now trading about 4% below their issue price, while Lingyi has closed above its offer price on just two days since its debut in June. George Wu, head of equity capital markets for Asia Pacific at DLA Piper, noted that 'one of the long-term issues people discuss about Hong Kong's market is liquidity, but if there are so many non-genuine investors then liquidity definitely will be an issue.'
