EquitiesFirst Financing Could Help Support Investors and Public Companies Following Hong Kong IPO Recovery

The Hong Kong initial public offering market, once a powerhouse in the global financial sector, has experienced a significant downturn in recent years. However, industry experts and market analysts are cautiously optimistic about its potential recovery and the broader implications for the city’s economy and business environment. EquitiesFirst, a provider of equities-based financing, could help support public companies and shareholders as the market recovers.

Current State of the Market

Hong Kong’s IPO market has faced numerous challenges in recent years. According to consulting firm EY, the first half of 2024 saw IPO proceeds in Hong Kong drop by 34% compared to the same period last year, with only $1.5 billion raised. This decline is particularly stark when compared to the market’s peak years of 2020 and 2021, when nearly 100 or more IPOs raised tens of billions of dollars.

There are several reasons for this downturn. High U.S. interest rates, increased regulatory scrutiny, slower economic growth, and ongoing U.S.-China tensions have all contributed to the constrained IPO environment in Greater China over the past three years.

Yet George Chan, global IPO leader at EY, provides some positive context for the current situation.

“I think it will take a couple years to go back to the peak [in 2021] but the trend is there. I can see the light at the end of the tunnel,” he told CNBC in July.

Despite the overall decline, there are emerging signs of a potential market revival. The week of July 8, 2024, for example, marked the busiest week for IPOs in Hong Kong this year, with six new listings. These listings spanned various sectors, including artificial intelligence, health care, ride-hailing, oil refining, and aircraft manufacturing.

Furthermore, the Hang Seng Index has shown positive movement, rising more than 5% year to date after four consecutive years of decline — its worst losing streak in the index’s history.

CNBC reported that Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, said that the exchange has received 73 new listing applications so far this year, representing a 50% increase compared to the second half of 2023. She noted, “The pipeline is building up nicely,” with approximately 110 IPOs in line for a Hong Kong listing.

One encouraging sign for potential issuers is the improving post-IPO performance of newly listed companies. EY reports that the average first-day return of new listings on the Hong Kong stock exchange in the first half of 2024 was 24%, up from a 1% average during the same period last year.

George Chan of EY emphasized the importance of this trend: “The aftermarket performance of Hong Kong IPOs has been doing quite good compared to the past five years. These things added together are projecting an upward trend for the Hong Kong market [in the] next 5 years.”

Potential Impact on Hong Kong’s Economy

In a recent op-ed, Gordon Crosbie-Walsh, the chief executive officer for Asia at EquitiesFirst, argued that a revival in Hong Kong’s IPO market could have far-reaching consequences for the city’s economy. He suggested that a healthy stream of listings could boost trading volumes on the exchange and create wealth for founders and early investors, and that it could support the return of more institutional investors.

Crosbie-Walsh pointed out the historical interconnection between Hong Kong’s economy, stock market performance, and property prices. He noted that between 1997 and 2018, the Hang Seng Index quadrupled in value, while residential property prices nearly tripled between 1997 and their 2021 high.

A revitalized IPO market could be bolstered by the equities-based financing offered by EquitiesFirst. This form of financing allows shareholders in public companies to obtain capital financed through their listed stocks, potentially providing a valuable source of liquidity that can support growth without sacrificing a long-term position.

Newly listed stocks can be used to secure financing for investments in new ventures or refinancing of corporate debt. This could be particularly beneficial during a period of financing hesitancy amid high interest rates during what has been termed a “funding winter” for private equity and venture capital investment in China.

The potential for equities-based financing is significant. KPMG expects $60 billion Hong Kong dollars ($7.68 billion) of IPO proceeds to be raised in Hong Kong by the end of this year. This influx of new listed stocks could provide a substantial pool of assets that can be leveraged for further investment and growth.

And a recovery in Hong Kong’s IPO market could have positive ripple effects for China’s broader innovation ecosystem. Private equity investments in the Asia-Pacific region fell from $359 billion in 2021 to $147 billion in 2023, with China’s share of deal value dropping from a 2018-22 average of 43% to 28%, according to Bain & Company.

Crosbie-Walsh argued that a sustained recovery in Hong Kong’s IPO market would help private capital investments in mainland China recover by providing an exit strategy for these funds. This, in turn, could free up more capital for some of China’s most innovative companies, supporting the growth of firms that could potentially list their shares in Hong Kong in the future.

Challenges Remain

Significant challenges remain for Hong Kong’s IPO market. The global economic environment, particularly stubbornly high interest rates in the United States, continues to impact investor appetite for new listings.

But interest rates are expected to decline this year, and George Chan suggests that a further reduction could have a significant effect on the IPO market: “I would say if the interest rate can be further cut down, 1% maybe, that would have a significant effect on the IPO market,” he told CNBC.

Additionally, China’s economic performance could be a decisive factor in the outlook for Hong Kong’s capital market. The slower growth in Chinese consumer spending, with retail sales growing by just 3.7% in May compared to nearly 10% or more in prior years, could impact investor confidence in consumer-focused companies seeking to list.

While it’s too early to declare a full recovery of Hong Kong’s IPO market, the recent uptick in activity and improving market conditions offer reason for cautious optimism. George Chan expects the number of deals to pick up in the second half of 2024, primarily in the medium-sized range of $HK 2 billion to 5 billion ($260 million to $640 million).

The potential revival of Hong Kong’s IPO market, coupled with the opportunities for equities-based financing, could play a crucial role in reinvigorating the city’s economy and supporting innovation across the Greater China region. However, the road to recovery is likely to be gradual and dependent on various macroeconomic factors and geopolitical developments.

For Hong Kong to reclaim its position as a leading global IPO hub, it will need to navigate these challenges while capitalizing on its unique position as a gateway to China’s vast market and its established financial infrastructure. The coming months and years will be crucial in determining whether the recent positive signs translate into a sustained recovery for Hong Kong’s IPO market and the broader economic benefits that could follow.