Cornerstones are difficult to corner

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In this day and age, and amid continued volatile markets, for an IPO to succeed it’s pretty much a pre-requisite to secure cornerstone investors. Not only does their involvement considerably de-risks a transaction by parking away a big chunk of the shares on offer at an early stage; it also provides a high degree of confidence to other institutions – and to retail investors – to encourage them to subscribe to a deal that’s already been taken up by big, visible names.

The cornerstone, it therefore seems, is the solution to all of an IPO issuer’s woes.

Picture the following scene. More than a dozen investment banks are being summoned to Shanghai or Beijing by a corporate – or a financial institution – that’s eager to achieve a listing on the Hong Kong stock exchange. The issuer is of a reasonable size – so it’s likely that its “H share” or “Red Chip” IPO will bring substantial, much-needed fees to those firms that can land a coveted global coordinator and bookrunner mandate. Even more so because the year so far has been pretty bleak for their equity capital markets departments. Given the time needed to take a flotation through to the closing stage, that one may well be able to price before those houses’ own financial year end – and soar up what is expected to be yet another round of depressed annual bonuses.

The banks have already submitted multiple pitches and have had to agree to all sorts of requests – some of which, frankly, unreasonable – for ongoing cooperation with the company. And now comes the coup de grâce: they will each have not more than two weeks to bring in one or more cornerstone investors to the transaction, failing which they will be relegated to a junior role in the deal, or worse, kicked out of the offer altogether.

So there you have it: a large group of houses eager for IPO riches are actively combing the market to try to find investors ready to each subscribe (at short notice) for allocations in the tens of millions of dollars – or higher. A stake they will be required to hold on to for a minimum period of six months.

The banks are obviously in fierce competition at this stage so there’s no coordination whatsoever. Sovereign wealth funds and portfolio managers from New York to London to Dubai to Singapore are receiving multiple calls and each time, the story is a little bit different – be it the valuation, the issuer’s prospects or other messages pertaining to the investment case.

It doesn’t take a Nobel prize winner to realize there’s probably a better way to manage the process. Investors get annoyed, no one appears to be in control and the outcome will, more often than not, be to assemble – if anything – a cornerstone group that includes corporates, suppliers or entities related in one way or the other to the issuer rather than true, bona fide institutional investors more commonly encountered in the global market place.

The reality is that no cornerstone investor – at least one that will add value to a deal – will part with US$50 million or US$100 million on the back of a telephone call from a broker, however trusty. Such contacts are often initiated months in advance after the signing of non-disclosure agreements. Wooing these accounts involves site visits, reading through draft offering circulars and meetings with the management of the company – not to mention negotiating subscription agreements. Importantly, the process should be coordinated so that these accounts can be given a single point of contact to discuss the opportunity, and for the story to be consistent across the board after it has been sharpened through multiple due diligence meetings.

An ideal scenario that’s a far cry from the shambolic, quick and dirty mess that seems to take place nowadays.

Getting a deal done is one thing. Getting it done right is another altogether.

Philippe Espinasse, a former investment banker, is the author of “IPO: A Global Guide” (HKU Press).

[This article was originally published in The South China Morning Post on 6 August 2012 and is reproduced with permission.]