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Public crush

7 September 2012 By Peter Thal Larsen

Asia’s scarce IPOs are attracting a crowd. Amid a dearth of listings, underwriters are jostling for a role on new equity offerings. Bankers get league table credit, while companies can claim safety in numbers. But there’s no future in scrapping over a dwindling fee pool. Banks must justify their existence in other ways – or shrink.

As in other parts of the world, Asia is suffering from an IPO drought. Companies listing in Hong Kong have raised just $5.6 billion so far this year – a third of the equivalent figure for 2011. In China, IPO proceeds have halved.

This has prompted an unseemly scramble to work for the few companies still coming to market. Chinese insurer PICC, which is still pressing ahead with a $3 billion Hong Kong listing, has hired 17 banks. Astro Malaysia, a pay-TV firm, has 12 underwriters working on its offering, which could raise about $1.75 billion.

There’s a short-term rationale for the frenzy. Bankers get to look busy, while claiming equal credit in industry league tables for their work. Meanwhile, companies can take advantage of the competition to squeeze fees, or encourage banks to drum up pre-IPO “cornerstone” investors.

Yet the activity can’t mask the pressure on banks’ bottom lines. Because underwriters charge a commission on the amount they raise, lower valuations mean IPOs are already less lucrative than during the boom. Dividing the spoils between a large number advisers means many will struggle to cover their costs.

Investment banks that claim to offer a full service to clients can hardly opt out of working on IPOs. To justify their existence, however, they will have to seek other sources of income. Block trades such as AIG’s $2 billion sale of shares in AIA, its former Asian subsidiary, can help. Some banks are also seeking to raise more money for private companies, or arranging derivatives and other structured products. Such work is often less competitive, and therefore more lucrative. Those that lack the broader range of products – or deep pockets to sit out the slump – have little choice but to shrink.


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