Chinese IPOs: Small is beautiful for Chinese initial public offerings, which leaves big bank underwriters like China International Capital Corp and Goldman Sachs with slim pickings. So far in 2011, action has shifted to China's second-tier stock markets, which favour nimbler small underwriters. The southern city of Shenzhen has raised twice as much equity capital as Shanghai this year. Big guys need to adjust.
Other than UBS and Deutsche Bank, foreign branded securities joint ventures have appeared on not a single IPO this year. Nor has domestic giant CICC, which this time last year was the top underwriter with 11 deals. Two Shenzhen-based small firms, Ping An Securities and Guosen Securities, surged to the top. Together with 48 deals, they account for 22 per cent of the $30 billion IPO proceeds this year.
That reflects a shift in the IPO market. Large privatisations like the $10- billion listing of Agricultural Bank of China in 2010 are scarce, since most of China's state-owned enterprises are now listed. This year's biggest IPO, of Sinovel Wind, was just $1.4 billion. Demand is geared to small private companies, which had been made to wait in line by regulators, but are popular with China's big retail investor base.
The economics of smaller deals are getting more attractive, too. The average IPO in Shanghai is 3.5 times the size of those on growth-company market ChiNext, in Shenzhen, but the fees aren't proportional. Smaller IPOs offer 4-5 per cent, compared with roughly 2 per cent for the biggest. In money terms, a big-board IPO offers on average 40 per cent more fee than a second-tier IPO, but with a lot more balance-sheet risk.
Big firms may thus need to think small. That might mean top China bankers head to the provinces more often to win over smaller clients. Global banks could also be more generous about sharing their global connections with local joint-venture partners, which the foreign partners often try to avoid, since they only own minority stakes. Of course, the global banks could always sit on their hands, and wait for big deals to come back into fashion. By that time, their smaller rivals may not be so small any more.