After a difficult period, the Hong Kong primary market has regained momentum. Sponsor calendars are full, the regulator has streamlined several parts of the vetting process, and a number of large mainland issuers have returned to the exchange. For a firm with our history in pre-IPO investing, this is a period that calls for more discipline, not less.
Volume is not the same as quality
In every strong listing cycle, the second half of the pipeline is weaker than the first. Companies that would not have contemplated a listing in a quiet market are pulled forward by their advisers and by the sight of peers trading at attractive multiples. Pre-IPO rounds in these companies are often priced as though the listing were certain and the after-market would be kind.
Our response is to underwrite every pre-IPO position as though the listing might not happen. If we would not be comfortable owning the business as a private company for five years at the entry price, we do not invest, however advanced the listing process appears.
Three questions we ask
- Would this company be listing if the market were closed? Businesses with a genuine need for public capital and a strategic reason to list behave differently from those responding to a window.
- What does the cornerstone book look like? A book built on relationship allocations rather than on fundamental demand tells us something about after-market support.
- How much of the pre-IPO round goes to the company, and how much to selling shareholders? A large secondary component at a premium valuation is a signal we take seriously.
Where we see value
The most interesting opportunities are in companies that have quietly built scale in unfashionable sectors: industrial services, specialised healthcare, logistics, and enterprise software serving regional customers. These businesses attract less sponsor attention, price their pre-IPO rounds more reasonably and tend to list with realistic expectations.
We are also seeing value in companies that listed in the previous cycle, traded down sharply and are now generating cash at valuations that make little sense. Several of these suit our listed equities and special situations strategies better than the pre-IPO one, a reminder that the label on the strategy matters less than the quality of the business and the price.
Holding through the listing
We are under no obligation to sell at the IPO or at the end of the lock-up. Our best pre-IPO investments have been those where we remained on the register for years after listing, took part in subsequent placements and continued to engage with management as long-term owners. That behaviour is rare enough in Hong Kong that founders notice it.