Treasury Practice

Best practice: IPOs

Published: Jan 2015

Portrait of Max Loh
Max Loh, ASEAN and Singapore Managing Partner, EY:

The success of the Alibaba IPO is largely due to the potential that the company has and investors’ appreciation of this. It was therefore a very considered choice for Alibaba to list in the US, as this market is home to many sophisticated investors who understand the complex business model of Alibaba.

Asian companies tend to list in either their home markets or two of the region’s more established exchanges, namely Hong Kong and Singapore. Asian companies tend to do that as investors in the home or regional markets will be familiar with the company, its offerings and brand, and this helps in achieving better valuations. This is especially true for companies in the retail, consumer products and services sectors. The US, on the other hand, is seen by many as a preferred destination for e-commerce and technology companies, given greater investor knowledge and appreciation.

To ensure the success of an IPO, the treasury function should be at the fore of the process alongside the business, given its understanding of the company’s operations and how much cash it should look to raise and how it is to be deployed.

There are many other factors which influence the decision of where a company can or should list, as each exchange and domain market has its own differing set of criteria, regulations, adopted accounting standards and laws. It was widely reported that another key reason for Alibaba’s listing in the US was the dual share structure the market offered. Otherwise, the differences are quite subtle and companies will often be flexible enough to accommodate and comply with the rules of the exchange of its choice.

Across Asia Pacific, countries are looking to build up their exchanges. Locations like Hong Kong and Singapore currently have the advantage of being international financial centres, with lots of depth and liquidity. They are also popular with foreign companies that view North Asia and South East Asia respectively as their key markets. Other exchanges in the region are more focused on attracting domestic companies.

Role of the treasury

To ensure the success of an IPO, the treasury function should be at the fore of the process alongside the business, given its understanding of the company’s operations and how much cash it should look to raise and how it is to be deployed.

Following the IPO, the role of the treasury function shifts back to its more traditional role of investment appraisals and managing cash flow, liquidity and financial risks. This already vital function becomes more important as the success of the IPO will ultimately be judged by the financial metrics of the company.

In presenting the IPO story to investors, it is important to demonstrate how the proceeds raised will be put to good use. The treasury function has a key role in explaining this. During the IPO process, the treasury also needs to help build investor confidence by demonstrating that the company is adept at making both returns on their investment and managing financial risks.

Following the IPO, the role of the treasury function shifts back to its more traditional role of investment appraisals and managing cash flow, liquidity and financial risks. This already vital function becomes more important as the success of the IPO will ultimately be judged by the financial metrics of the company. Also, with the company now being public-listed, accountability, governance and transparency become more crucial and accordingly, the treasury function must ensure it steps up to the mark in this regard.

Portrait of Matt Emsley
Matt Emsley, Partner, Corporate, Herbert Smith Freehills:

Alibaba hit the headlines following its recent IPO, not just because of its large size, but because it decided to list in the US and not Hong Kong. Traditionally, Chinese companies see Hong Kong as the gateway to global capital markets and look to the Hong Kong market when launching an IPO. However, Alibaba went against this trend and highlighted reasons why some corporates from China may look to the US and not Hong Kong.

The primary reason for Alibaba’s listing in the US rather than Hong Kong was because of the management and voting structure that Alibaba adopted. The current regulations in Hong Kong apply a one share, one vote policy. However, Alibaba wanted a structure that gave greater voting power to the key management, one that is permitted in the US market. Indeed, similar structures have been adopted by a number of Chinese companies seeking listing in the US, and in particular internet companies, in recent times.

The public debate in respect of the one share, one vote policy as a result of Alibaba’s decision to list in the US has seen the Hong Kong Stock Exchange issue a conceptual consultation with the market, seeking views regarding the one share, one vote concept. The Hong Kong Stock Exchange has also, in recent years, clarified its approach to the listing of companies adopting variable interest (VIE) structures where the companies are in restricted industries. Such a structure allows the channelling of the economic benefits from the business to the listed group by way of contractual arrangements with a third party who actually owns the business and assets, for businesses where foreign ownership of the business is restricted under Chinese law. As a result, there have been a number of Hong Kong listings of Chinese internet businesses in recent years, where previously they may have sought a listing in the US.

One of the key requirements for a listing on the Main Board of the Hong Kong Stock Exchange is compliance with one of the three alternative financial tests. These require the applicant to meet specified thresholds for profit, revenue and market capitalisation or revenue, cash flow and market capitalisation. Companies are also generally required to have management and ownership continuity for the most recent three financial years and one year, respectively.

Once the IPO is complete, treasury will finally be required to manage the FX risk and regulations when repatriating its proceeds. In order to carry out these roles efficiently, treasury should be introduced to the process as soon as possible.

Other items to be aware of during the listing process in Hong Kong are the Hong Kong regulators’ expectations of sponsors and the level of due-diligence they conduct, that have become stricter since regulatory changes implemented in the last year. A further regulatory change was the adoption of a requirement that, with effect from April 2014, the application proof of the prospectus filed with the Hong Kong Stock Exchange be made publicly available on the Hong Kong Stock Exchange website upon filing. There were concerns that this may make the Hong Kong Stock Exchange more unattractive to some companies, though the market has quickly adapted to this requirement.

Outside of Hong Kong, Singapore has been a popular IPO destination over the last 12 months and has seen some large listings. The market receives a lot of interest from South East Asia based companies, while Chinese companies have tended to generally look to Hong Kong. This is primarily due to market valuation and familiarity of investors there with Chinese companies.

The treasury can have a key role to play during an IPO, especially around restructuring the organisation. For example, Chinese companies listing in Hong Kong will often reorganise their shareholding structure in advance of seeking a listing so that they are held by an offshore entity subject to compliance with PRC regulatory requirements. As part of this reorganisation, financing will often be required to fund the reorganisation that the treasury will manage, with such funding often provided through pre-IPO investments. Also, in Hong Kong the organisation is required to be financially independent of its controlling shareholders. To achieve this the treasury may need to restructure any loans from shareholders and bank loans where shareholders have provided guarantees in preparation for listing. The negotiations with the banks typically either remove shareholder guarantees completely or otherwise replace the shareholder guarantees upon listing with a guarantee from the listing vehicle. Once the IPO is complete, treasury will finally be required to manage the FX risk and regulations when repatriating its proceeds. In order to carry out these roles efficiently, treasury should be introduced to the process as soon as possible.

The next question:

The war for talent continues in Asia. What innovative approaches are treasury departments in the region taking to attract and retain talented individuals? Also, how can in-house talent be developed to add more value to the company?

Please send your comments and responses to qa@treasurytoday.com

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