[Newsphopick=Kingsley Lim] Hong Kong - As Hong Kong attempts to curb the coronavirus with new social restrictions, it prepares itself for billions in investments via new share sales as a number of notable IPOs hit the market. Global fund manager investing in IPOs in the Hong Kong stock market now face an obstacle as they have to compete with the city’s retail investors for a slice of the pie.
Retail investors have been extremely aggressive in participating in a recent initial public offering, leading to record demand which had forced fund managers and institutional investors to hold onto shares of newly listed companies.
According to market observers, Hong Kong, which is a fierce competitor of New York and London for capital, has seen retail investors buying aggressively in IPO offerings. Since competition is rife, fund managers have had to take a smaller share of the pie. >This competition from retail investors has forced fund managers to adapt and survive. More frequently, fund managers are becoming ‘cornerstone’ investors in IPOs. This means that before an IPO is formally launched, fund managers work out a deal with the listing company to acquire shares in the company before retail investors do. As a result, fund managers have priority over the shares but most hold the shares for at least six months.
Accumulated stock exchange data, a recent listing of Chinese biotech company Ocumension Therapeutics, allowed the company to raise HK $500 million (US $65 million) from investors. Notably, shares that were allocated to retail investors was close to 1,900 times oversubscribed, breaking all previous records for an IPO.
Under IPO rules in Hong Kong, retail investors are typically allocated 10% of an offering. However, Hong Kong’s ‘clawback’ rule is triggered when there is an oversubscription of shares by retail investors. In such cases, retail investors may be entitled to as much as 50% of the offering.
"Strong retail demand is the key reason we see more and more institutional investors willing to consider becoming a cornerstone investor," said Cathy Zhang, a Morgan Stanley managing director.
Shares in Ocumension Therapeutics has seen frenzied trading. Its share price rose from HK $14 to HK $37, before settling at HK $29 on last Friday’s trading session.
While Asian IPOs from Korea and Japan have seen strong interest from retail investors, Hong Kong’s markets remain the destination of choice for companies who want to tap funding from equity markets. Hong Kong has one of the most active retail investor populations in the world. According to an OECD study, retail investors in Hong Kong own 30% of the market – higher than 11% and 16% seen in United States and Britain respectively.
This strong participation from retail investors is an indication of the market’s willingness to speculate. As such, companies which are newly listed are sometimes overvalued. "It is a consensus among institutional investors that valuation for the majority of the biotech companies listing in Hong Kong are stretched," said Ke Yan from Aequitas Research.