Hong Kong IPOs: Invitation-Only Deals Reward Allies

Hong Kong's initial public offering market is experiencing a significant boom, with new listings yielding an average first-day gain of nearly 30% this year. This surge has transformed the process of acquiring shares in popular IPOs into an exclusive event, akin to an invitation-only affair.

Companies are increasingly taking a direct role in selecting who receives shares, often reserving allocations for strategic investors, business partners, and close allies. This practice, sometimes referred to as "friends and family," leaves traditional investment funds struggling to obtain desired allocations. This approach marks a departure from previous years when investment firms primarily competed amongst themselves for shares.

The trend is exemplified by Victory Giant Technology Huizhou Co.'s $3 billion listing, where over 20% of the deal went to top shareholders of Nvidia Corp. due to the chairman's desire to align investor rosters. Similarly, Lingyi iTech Guangdong Co.'s June listing saw over a third of institutional investors fail to secure shares because management was heavily involved in allocations.

While selecting familiar investors isn't entirely new, its current function has shifted. Previously used to bolster deals with weak institutional demand, companies now aim to reward business associates like suppliers and customers with potentially high-performing IPO shares. This new allocation strategy, however, raises concerns about price distortion, transparency, and fair treatment of minority shareholders, drawing increased scrutiny from Hong Kong's market watchdog.