Linklaters leads the way in Hong Kong IPO surge

After years of recession, has the Hong Kong economy finally bounced back? Last year proved to be a bumper 12 months for Hong Kong-based lawyers thanks to the record number of companies raising cash through initial public offerings (IPOs).

The amount of funds raised via IPOs in 2004 was HK$94.5bn (£6.34bn) - an increase of 62 per cent for the same period in 2003 according to statistics provided by PricewaterhouseCoopers (PwC).

In PwC's market year-end review, the accountancy firm predicts the appetite for IPOs will continue into 2005 and that funds raised will reach a record high of HK$138bn (£9.26bn) this year.

This view is supported by Linklaters Asia managing partner Simon Davies, whose firm advised the underwirter on the $1.8bn (£940m) Ping An Insurance 2004 listing - Hong Kong's largest IPO last year.

"We expect high levels of IPO activity to continue, given the continued global interest in the PRC [People's Republic of China] economy and the opportunity IPOs provide for global investors to tap into this growth," says Davies.

If the insurance sector dominated new listings in Hong Kong in 2004, it is the banking community that is this year expected to lead the way for companies coming to market in 2005. This year, Bank of Communications, Bank of China, China Minsheng Banking Corp, China Construction Bank and the Agricultural Bank of China are all expected to make their stock market debuts.

It is understood that Linklaters and Sullivan & Cromwell have already scooped instructions to advise the issuer on the Bank of Communications IPO, while Slaughter and May and Shearman & Sterling are advising the underwriters.

Linklaters is also understood to be advising the underwriters on the China Minsheng Banking Corp IPO alongside Cleary Gottlieb Steen & Hamilton, with Clifford Chance advising the issuer.

It is only on these premium mandates where firms are really making money. Lawyers contend that, although firms advising on IPOs valued in excess of $750m (£392.8m) can command much higher fees than they were charging a year ago, on plain vanilla deals charge-out rates continue to be squeezed.

A firm advising the underwriter on a Hong Kong IPO that raises $25m-$50m (£13.1m-£26.2m) will typically bill around $400,000 (£209,400). Meanwhile, on average, a firm acting for the issuer on an equivalent IPO will bill between $220,000 (£115,200) and $250,000 (£130,900).

In contrast, fees charged by the issuers' lawyers on larger IPOs raising more than $750m (£392.8m) can be as high as $1.5m (£790,000), while underwriters' legal teams have been known to bill around the $1m (£520,000) mark.

Unsurprisingly, the top end of the market is dominated by the magic circle firms, with the exception of Allen & Overy, which appears to be absent from the high-profile deals that completed last year.

Davies says: "The larger deals of course tend to attract higher fees. We focus on the high-profile transactions, which are complex and require greater innovation and, as a consequence, command premium rates."

A number of US firms, including Sullivan and Shearman, are also muscling in on the IPO market as the trend towards the Rule 144A offering continues.

Consequently, this resulted in greater competition among the smaller City firms at the bottom end of the market.

Indeed, one partner based in the Hong Kong office of a magic circle firm argues that smaller IPOs have turned into a volume business. Another Hong Kong-based partner at a top 30 City firm says his firm is not going after IPO work as it is not very lucrative. "I personally don't like doing IPO work, because they involve a lot of work and don't generate much in the way of fees. It's much more lucrative to advise on M&A work," he comments.

Having already secured two key instructions on what are expected to be among 2005's biggest IPOs - with fees to match - Linklaters may beg to differ. The battle is now on for the remaining mandates.