The Malaysian capital has put in an impressive performance in the IPO market this year. But talk of challenging Hong Kong is premature, says Jessica Seah 

For three years, Hong Kong led the world in initial public offerings (IPOs) and international law firms piled in to get a piece of the action. But the market started slowing down late last year and things have not picked up.

So far in 2012, the formerly number one Hong Kong Stock Exchange ranks only ninth in the world in terms of funds raised in IPOs, according to statistics from market analysts Dealogic.

However, another Asian city has come from far behind to become the region's IPO champ. Kuala Lumpur's Bursa Malaysia, 15th in the world in 2011, so far ranks third this year, behind only the two major US exchanges: the New York Stock Exchange and Nasdaq.

Malaysian sensation
The $3.3bn (£2.07bn) listing in June of Malaysian palm oil company Felda Global Ventures Holdings was 2012′s second largest after Facebook. Last month, Kuala Lumpur also saw the $2bn (£1.25bn) IPO of hospital chain IHH Healthcare. A $1bn (£628m) debut for port operator Westports Malaysia is expected later in 2012.

So, is Kuala Lumpur the next big thing? "It really is the only game in town now, so it's getting a lot of attention," says Matthew Bersani, the Asia managing partner for Shearman & Sterling. But it's all relative. "The rest of the [capital markets] world is dead, so by comparison it looks great."

Indeed, Malaysia's $5.8bn (£3.6bn) in IPOs so far this year is not so impressive compared to the $31.4bn (£19.7bn) in Hong Kong IPOs raised last year.

If year-to-date figures for the Shenzhen Stock Exchange's main board and its ChiNext growth-stock market are combined, they total almost $9bn (£5.6bn), which looks certain to end up considerably down from last year's $26bn (£16.3bn).

Bersani notes that Felda is state-owned and IHH is majority-owned by Malaysian sovereign wealth fund Khazanah Nasional, a fact that may have boosted investor confidence.

State funds have invested heavily in the country's stock market, which the Malaysian government is pushing to deepen, but Bersani thinks it is unlikely to be a long-term phenomenon.

"Malaysia has had a good year given its state-mandated deals, but those don't go on forever," he says.

Chei Liang Sin, a Singapore partner at Latham & Watkins, says the fact that offerings are being led by state-owned enterprises means that the market is still developing; a more mature market would see more private listings.

"Whether or not it can compete with markets like Hong Kong, or even Singapore, over a longer period of time is yet to be seen," she says.

Positive predicitons
Cleary Gottlieb Steen & Hamilton counsel Robert Williams agrees that comparisons with Hong Kong are a stretch, but says there are still worthwhile opportunities for international firms in Malaysian capital markets.

Williams was part of a team from Cleary that advised Felda on its IPO. He is confident the pipeline of Malaysian IPOs will continue to be a bright spot this year for the firm, which has an informal Malaysia practice led by Hong Kong partner Sung Kang.

Other major global firms targeting Malaysia work include Clifford Chance and Linklaters. Baker & McKenzie has a Malaysian affiliate firm, Wong & Partners, and leading Singapore firm Allen & Gledhill has an alliance with Kuala Lumpur's Rahmat Lim & Partners.

Among other deals in the works, TV operator Astro All Asia Networks and power company Malakoff Corp are both planning to list in the next year or so. Malakoff recently lined up banks for its $1bn (£628m) offering, while Astro, part-owned by Khazanah Nasional, is seeking regulatory approvals for a $1.5bn (£943m) issue.

According to Williams, Cleary is also advising some other blue-chip Malaysian companies on possible IPOs. "These are companies that have listed before and then delisted, and are now looking to relist again," he says. "And many of them are big household names."

Those excited about a Malaysia practice may soon have a tough choice to make. Foreign firms are currently barred from having offices in the country.

But although the regulatory framework is not yet in place, the country's Legal Professions Act was amended in April to eventually allow foreign law firms to set up offices and practise in Malaysia via partnerships with a local firm or by obtaining a qualified foreign law firm licence.

With many firms already in nearby Singapore, a Kuala Lumpur office could be hard to justify. Bersani says he does not think the recent IPO activity yet warrants a shift in resources.

Williams also does not see the status quo changing at Cleary, which has no Singapore office and covers Southeast Asia out of Hong Kong.

"I know we are a little unusual doing Malaysia work out of Hong Kong, but we are used to the travelling. So I think it's going to stay that way for now."

This article first appeared in The Asian Lawyer, an affiliate title of Legal Week.