Why an IPO recovery would mean so much to Hong Kong

By Gordon Crosbie-Walsh, Chief Executive Officer, Asia, Equities First Holdings

1 August 2024

After a disappointing few years for Initial Public Offerings in Hong Kong, there are some early signs of a revival. Six listings in the week of 8 July made it the busiest five days for IPOs so far this year. At the time of writing, seven companies – from sectors including AI, healthcare, ride-hailing, oil refining and aircraft manufacturing – have made their trading debuts since then.

Many headwinds remain, but optimists will believe that there is upside for Hong Kong’s once-robust IPO market: the city ranked 13^th among global equity markets for IPO proceeds in the first half of this year with the smallest amount raised in 20 years.

Every financial centre covets IPOs, but a healthy stream of new listings would have a particularly significant impact here in Hong Kong. Of course, it would boost trading volumes on the exchange and create wealth for the founders and early investors in the newly-listed companies. But the recovery of the IPO market would also have much further-reaching consequences.

It would drive the local economy by supporting the return of upside risk takers and the city’s established wealth-creation dynamics. It would also have a multiplier effect on the availability of local and global capital for innovative Chinese companies by allowing venture capital and private equity investors to exit potentially or otherwise and then deploy capital to new investments. And liquidity also begets liquidity: more listed stocks would potentially mean more assets that can be used by shareholders to secure financing for purposes such as investment in new ventures and refinancing expensive corporate debt.

Wealth creation

Hong Kong’s economy – and the confidence of its corporates and investors – are closely connected with the fortunes of the stock market and IPOs in particular. Historically, new listings, a positive performance trend for local stocks and the property market have been key drivers of wealth creation in a city where 48% of people invest directly in stocks and 53.8% own property.

These three drivers have often reinforced each other. The Hang Seng index more than quadrupled in value between its 1997 low and 2018 high of over 32,000 points. Residential property prices likewise nearly trebled between 1997 and their 2021 high. And Hong Kong was also the world’s biggest IPO market in 2016, 2018 and 2019.

During the period of ultra-low interest rates, banks extended financing for IPO subscriptions, fueling demand and valuations. Gains from stock market investments could be reinvested in property, driving up the value of real assets, which could be used as collateral for further investments. And stock and property prices kept going up.

This dynamic began to break down as the performance of Hong Kong equities faltered in 2021. Local shares continued their decline as global investors reduced their exposure to China and the US Federal Reserve started its aggressive cycle of interest rate increases in March 2022.

These trends, combined with the impact of Covid-19 restrictions, also reduced the availability of private equity and venture capital funding for Chinese firms. Private equity investments in Asia Pacific fell from US$359bn in 2021 to US$147bn in 2023, with the proportion of deal value in Greater China falling from a 2018-22 average of 43% to 28%, according to Bain. Venture capital investment followed a similar pattern, reaching a seven-year low in China last year, according to KPMG.

Any sustained recovery in the Hong Kong IPO market would clearly help private capital investments in China recover by giving those funds a more viable way to exit their investments. In turn, that would free up more capital for some of China’s most innovative companies, supporting the growth of firms that could go on to list their shares in Hong Kong.

Asset creation

A third, implication of a recovery in the city’s IPO or primary market is that it would create a new stock of listed equities – that could be used to secure financing for other purposes.

KPMG expects the equivalent of $7.7bn of IPO proceeds to be raised in Hong Kong by the end of this year, generating new wealth for the sellers and a new wave of listed stocks. The latter can be used collateral for borrowing that can be used for purposes including investment in new ventures or refinancing debt through shareholder loans.

During what has been called the “funding winter” for private equity and venture capital investment, borrowing against listed shares can be an especially valuable source of capital for China’s innovation ecosystem.

It’s still too soon to call the return of IPOs in Hong Kong and the wealth creation that they helped to power. The revival in issuance is nascent, deal sizes are smaller than last year and some of the recent new listings did not perform well in early trading. Furthermore, the Hang Seng Index is up for the year but has been trending down since May, when residential property prices also dipped again after showing some signs of recovery earlier in the year. China’s economic performance will naturally be a decisive factor in the outlook for Hong Kong’s capital market, too.

But these signs of recovery in the city’s primary market are an encouraging sign that promising companies can once again access capital here. If the stream of new listings can be sustained, it would provide a welcome “feelgood factor” in Hong Kong, create some of the conditions for wealth creation and risk-taking to return and provide essential capital for innovative firms across China.

This article was first published in the South China Morning Post, Opinion section, on 28 July 2024.

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