Demand for public stock offerings in Hong Kong and throughout the region remains strong, despite a few recent deals that struggled, according to a panel of three investment bankers and one hedge fund investor.
The fact is liquidity remains incredibly strong, said Steven Barg, head of Global Markets, Asia, for UBS AG (UBSN.VX). As long as you have a solid company, differentiated from what's out there in the secondary market today, the IPO market and the follow on market is still available.
Barg was joined by Liang Meng, managing director at hedge fund D.E. Shaw, Chris Gammons, head of Citigroup's (C.N) Asia Pacific Financial Entrepreneurs Group, and Scott Matlock, Asia M&A chairman for Morgan Stanley (MS.N).
The panel assembled for an exclusive Thomson Reuters event late last week.
Gammons said a lot of growth capital is sitting in China right now, at companies where investors decided to hold off on cashing-out late last year during the height of the financial crisis. The time is right for some of these companies to hit the public markets.
For some of the names, in retail and consumer--again, with a China bent--there is demand there. These are investments where $30 million turns into 3X, Gammons said, referring to an investor making three times their money. Now is a good time to achieve that kind of internal rate of return, he said.
With M&A activity being a bit slower, the public markets are allowing monetizations that otherwise could have been done somewhere else, he said.
For example, TPG's IPO of Myer, Australia's largest department store chain, is expected to raise up to $2 billion.
Asia equity and equity-linked volume surged in September, with $21 billion worth of deals, Thomson Reuters data show, compared to around $2 billion a year earlier.
In the past few weeks, however, several Hong Kong IPOs have been battered after listing, causing some in the market to think that the burst of deals had caused investor indigestion and that the public offering window was closing.
Barg said technical reasons and over-supply played a role in some of the disappointing debuts. Investor interest in the half-dozen property IPOs in the market depends on a fund's time horizon, he said.
If you are a mutual fund, and you have to report a positive performance at the end of every quarter, you're going to think twice about investing in a China real estate IPO because there is so much secondary product out there in the market that may be as cheap or better fundamentally, Barg said.
But there are plenty of investors with less outside pressure willing to invest in solid companies in the region, according to Barg.
Shares of Chinese property developer Glorious Property Holdings (0845.HK) fell 18 percent in their Hong Kong debut on Oct. 2. The company raised $1.28 billion through its IPO.
DE Shaw is one of Glorious Property's investors. Although the company traded poorly in the aftermarket, DE Shaw's Meng said that it's still been a good investment for the hedge fund, particularly in light of the perfect storm that hung over the company a year ago.
When the market was bad late last year, early this year, we were flexible, Meng said, adding that DE Shaw approached Glorious Property about making some changes to allow for an IPO when the time was right. Meng runs DE Shaw's Hong Kong office, spending most of his time on private equity-style deals.
The last 12 to 18 months taught a lot of PRC (Chinese) companies a good lesson, Meng said. Markets do open and shut very abruptly. We told our companies to be ready when the window is open.
With public markets allowing investors to cash out, there is less pressure for companies to seek takeover offers.
Private equity firms, in general, are actually quite good about being balanced at where to price things because they know they're going to be doing this for 10, 20, 30 years, Morgan Stanley's Matlock said.
Private equity firms, which have institutional investors locked up with them usually for ten years, seek to exit an investment after 3 to 5 years. Typically 80 percent of a private equity firm's profit on a deal goes to those institutions.
Matlock mentioned the view of private equity investors as the guys who will take every last dollar in every trade they make.
I just don't think that's the case. I think they actually are quite balanced at how they price things because they want people to make money off their deals, Matlock said.
For announced Asia Pacific M&A deals of up to $500 million, year to date volumes fell 23 percent to $113 billion, according to Thomson Reuters data.
Companies will always seek the lowest cost of financing, Barg said. And the lowest cost of financing is always public.