Slump in HK IPO market has seen pricing fall by as much as 40%, as Elizabeth Broomhall discovers

The first half of 2011 saw a swathe of top US law firms follow their UK counterparts by building up in Asia. Together, they were eyeing a slice of the lucrative market at a time when other economies were struggling.

Taking centre stage was the Hong Kong Stock Exchange (HKEX), attracting a steady wave of Chinese state-owned enterprises (SOEs) requiring capital and global companies seeking access to Asian investors.

With US law firms suddenly desperate to practise Hong Kong law, a handful of firms took an aggressive approach to market entry, throwing huge sums at the recruitment of expensive equity capital markets (ECM) partners for their local debut.

Kirkland & Ellis was undoubtedly the firm best typifying the trend, with the Chicago outfit bringing in eight new partners last August from Skadden Arps Slate Meagher & Flom, Latham & Watkins and Allen & Overy (A&O). The bulk of these partners specialise in corporate and ECM work.

The fall

Unfortunately for Kirkland and the rest of the international law firms, by the end of 2011 the Hong Kong initial public offering (IPO) market started to slow and just a year since the firm entered, the outlook is bleaker than ever.

Figures from Dealogic show the HKEX has raised just $3bn (£1.8bn) in new listings so far this year, compared with $23.8bn (£14.7bn) for the same period in 2011 and $28.6bn (£17.6bn) in Jan-Sep 2010.

The drop means the exchange has fallen eight places in Dealogic's global IPO ranking, from second place in 2011 to 10th this September. Partners say listings are at their lowest level in a decade.

And the inevitable high competition for scarce dealflow has prompted firms to offer significant drops in standard fee levels. Pricing is thought to have come down by up to 40% in some cases, feeding fewer lawyers in a bloodthirsty arena.

On average, partners estimate a drop of between 20% and 40%, putting legal quotes for a significant IPO down from between $1.6m (£986,000) and $2.2m (£1.3m) to nearer $1m (£616,700) and $1.7m (£1m).

However, these figures are being pushed lower still by some firms significantly undercutting the market, with partners pointing to a growing trend for firms offering IPO work at flat rates, which in some instances have dropped as low as $500,000 (£308,000) according to a recent article by The American Lawyer.

"Bankers have shared with us their very grim outlook of the market," says Elsa Chan (pictured), a partner at Baker & McKenzie's securities and capital markets practice in Hong Kong.

"They are forecasting a very difficult time over the next six months. The pace of transactions has become very slow. It's taking a lot longer to close deals. A lot are being postponed until 2013."

According to Dealogic, some $5.2bn-worth (£3.2bn) of high-profile Hong Kong listings have been withdrawn or put on hold this year, including that of the People's Insurance Co of China, which was postponed in June.

Though some remain in the pipeline others, such as the IPO of Graff Diamonds Corp, are unlikely to go ahead any time soon.

"It's been tough for law firms, especially those who have recently opened a Hong Kong office," Chan adds.

"The initial outlay for most firms has been very high. I'm sure the pressure is immense for these firms trying to meet their targets. Fee competition is also very fierce. Every time we go to a beauty parade, at least four or five other law firms compete."

Similarly concerning is talk of cutbacks, with several firms believed to be trimming their ECM staff. A&O asked four Hong Kong partners to leave this June across a range of practice areas, and the market is rife with talk of others doing the same, particularly in ECM.

"I think there are some who are doing it quietly," says another Hong Kong-based partner.

"Others who have more balanced practices are able to reassign staff, so some of the ECM associates are now doing document work for litigation departments. But there are definitely some firms laying people off."

The rise?

Perhaps surprisingly, many of the law firms are remaining outwardly positive. While none can deny the slump, most believe the negative turn is merely a reflection of the global economic circumstances, with investor sentiment sure to pick up.

"We're suffering more from lack of investor confidence than anything else, and much of that is being driven by the eurozone crisis," says Crispin Rapinet, Hogan Lovells' Asia head.

"But it's hard to believe that the popularity of the HKEX is going to disappear because it is the main centre for raising capital in China."

David Eich, founding partner of Kirkland's Hong Kong arm, agrees: "Every market is cyclical, and globally the capital markets are relatively slow.

"But we are pretty confident that they will come back very strongly eventually. There are thousands and thousands of Chinese companies which still need public capital."

Also having an effect is the evolving profile of listing companies, partners say, with smaller, private IPOs beginning to replace the earlier, colossal listings of China's SOEs.

Paul Chow (pictured), a corporate partner at Davis Polk Hong Kong, says: "Certainly a large number of SOEs have listed already.

"But there are still a lot of companies out there which are coming, such as energy, retail and food and beverage companies. There has also been an increase in international brands such as Prada, SBI and Samsonite."

But while speculation swirls about the pain international law firms are feeling behind closed doors, having made the commitment to the region, most have little choice but to sit and wait for the market to pick up again.

Some are focusing on M&A and litigation work while continuing to eye regional markets showing new potential.

"The mood in Hong Kong can change overnight," says Eversheds head of Asia Nick Seddon.

"There is no way it won't keep its place as one of the top three financial centres in the world. When the market comes back, Hong Kong will be there."

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