彭博特稿：港股IPO火爆下发行人自行挑选"亲友团"配售、机构抢不到份额，SFC已把监管关注扩大到簿记建档与配售环节

Hong Kong’s boom in initial public offerings has turned getting shares in the hottest deals into something of an invitation-only affair.

With new listings delivering an average first-day gain of almost 30% this year, demand is fierce. But companies are increasingly deciding themselves who gets a seat, carving out room for strategic investors, business partners and other close allies — sometimes colloquially grouped together as “friends and family” — and leaving some traditional funds struggling for allocations, according to people familiar with the matter.

Hong Kong’s IPO engine is hurtling toward record proceeds, fueled in a large part by Chinese companies along the artificial intelligence supply chain raising funds to keep up with insatiable demand. But the way deals are being allocated now shows a sharp contrast with years past, when investment firms mostly competed with each other and relied on close ties with banks to win allocations.

“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,” said Vikas Pershad, an Asia equities portfolio manager at M&G Investments. “It does seem like more of a dance, more of a process now than it has in the past.”

While there’s no suggestion that the handpicked investors cashed out in the short term, getting allocations can help maximize gains. Underscoring the excitement over the IPO boom, shares of more than 100 companies that debuted in Hong Kong this year have posted a weighted-average first-day gain of roughly 28%, data compiled by Bloomberg show.

One example of that price pattern 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.

Company executives were heavily involved in picking investors in the $3 billion listing, people familiar with the matter have said. More than 20% of the deal went to some of Nvidia Corp.’s top shareholders because Victory Giant’s chairman wanted to align the company’s investor roster with that of its most prominent customer, a person familiar with the matter said. Some other parts went to suppliers, Chinese funds that had an existing relationship with the company, and cornerstone investors that got more shares in the general order book, the person added.

Lingyi, Innolight

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, according to people familiar with the matter. One of the reasons was that Lingyi’s management team was closely involved in the allocations, the people said, asking not to be identified because they weren’t authorized to speak publicly.

To be sure, picking familiar investors isn’t new in Hong Kong IPOs. In the past, though, their typical function would be to help complete deals that drew weaker demand from large funds. In the years after Covid-19 when Hong Kong’s IPO market hit multiyear lows, bankers would speak of “non-market” deals to indicate listings with no real institutional demand.

But now, companies are looking to reward business associates including suppliers and customers by allocating them shares in their IPOs that are likely to do well in such a hot market, people familiar with the matter said. That can leave institutional investors who have done the legwork for an IPO, and often traveled to meet company executives, feeling shortchanged.

In some cases, people familiar with the matter say companies are simply more sensitive to whom they allocate to. That’s often animated by a desire to make sure that investors who engaged with the company early on get rewarded, instead of giving shares to short-term buyers.

In Nvidiasupplier 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. But the company was still heavily involved in the allocations after having met the investors beforehand to ensure they understood its business, according to people familiar with the matter.

A representative for Victory Giant declined to comment, while Lingyi iTech and Zhongji Innolight didn’t respond to requests for comment.

There are some signs that the 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 in Hong Kong. Since its debut in June, Lingyi has closed above its offer price on just two days.

Mispricing Risk

One risk for issuers is that micro managing the allocation of a significant portion of shares may result in IPOs, particularly small ones, being mispriced and leaving them vulnerable to pump-and-dump trading activity.

“That potentially raises price-distortion and transparency issues when the capital markets of Hong Kong rely on a fair, transparent system for pricing,” said Tom Chau, president of the Hong Kong Chartered Governance Institute.

Undisclosed allocations to friends and family would “run the risk of treating investors unfairly, falsifying demand, propping up prices and hurting market confidence and damaging minority shareholder interests in the long run,” Chau added.

While companies’ penchant for picking investors doesn’t imply wrongdoing, it’s emerging at a time of heightened scrutiny by Hong Kong’s market watchdog. The Securities and Futures Commission has broadened its regulatory oversight toward bookbuilding and share-allocation practices, people familiar with the matter have said.

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.

“One of the long-term issues people discuss about Hong Kong’s market is liquidity,” said George Wu, head of equity capital markets for Asia Pacific at DLA Piper. “But if there are so many non-genuine investors then liquidity definitely will be an issue.”

Hot Market

Getting IPO shares has been always competitive when investors are ebullient. In the main bookbuilding phase, institutional investors would jostle for a small portion of shares available for allocation. That’s because cornerstones — which get shares in exchange for holding them for a period of time — would have taken up a big portion of the deal, typically as much as half of it.

Mom-and-pop investors may have it worse, as the Hong Kong exchange last year introduced a mechanism that ensured institutional investors would get the bulk of shares offered in hot listings.

The crop of sizzling Chinese technology IPOs in the 2010s whetted the appetite for more listings, leading investors to realize the value in engaging with IPO prospects’ management teams over time, said M&G’s Pershad, whose firm made its first cornerstone investment in an Asia IPO in bubble-tea chain Mixue Group’s Hong Kong listing last year. Pershad said M&G gets low allocations if the firm hasn’t established relationships with the IPO candidate’s management team.

Picking investors may also be beneficial for specialized firms like biotechnology companies that may want to enlist business partners like contract-research organizations for the IPO, said Frank Bi, head of the Asia corporate-transactions practice at Ashurst, a law firm that has represented IPO investors.

“They have a relationship, whether it’s a business relationship or cooperation relationship; they can do business together,” Bi said. The company going public and the investors can share clients and market intelligence, he added.