Hong Kong: Changing Tides In Asia—Accessing The Financial Markets

Last Updated: 7 October 2011
Article by Conor T. Warde and Kristi Lynn Swartz

From a tiny fishing village and colonial trading port of tea, Hong Kong has transformed itself into, and is well established as, a global maritime and financial hub. Hundreds of thousands of vessels make port calls in Hong Kong each year, making it one of the world's largest and busiest ports. Besides being a major shipping hub, Hong Kong also is a vital capital market for companies seeking to raise funds. In the first half of 2011 alone, Hong Kong initial public offerings ("IPOs") accounted for US$23.6 billion in fund raising.

Among the available financing options, some of the largest shipping companies have undertaken or considered public listings on exchanges in Hong Kong, Singapore, New York, and elsewhere for their fleet expansions. A public listing is and will remain an attractive option to some, but private equity, especially for those with investments and operations in Asia, is proving to be an increasingly desirable alternative for shipping companies looking to grow their businesses. With the slowdown in the IPO market and recent market instability, this trend is likely to continue.

"Going Public"

Many factors have contributed to the rise of public offerings in the last number of years, but at the most basic level a company decides to "go public" because of (1) the ability to raise additional funds, (2) the impact it has on the company's internal operations and energy, and (3) increased visibility in the industry.

When choosing to list on an exchange, a company must carefully consider the market in which it wishes to be listed. New York has for a number of years been the marketplace of choice for shipping companies, but an increasing number of bankers and financial advisors have suggested that Hong Kong offers the most suitable market for shipping companies because the city is in the views of many the "nerve center" of the shipping industry, given its central location in Asia, and because of its strong financial, accounting, and legal industries that support the shipping industry.

Hong Kong is now the seventh largest exchange in the world by market capitalization and continues to be a key market for Chinese companies. In the first half of 2011, there were 48 IPOs by Chinese companies alone in Hong Kong.

In addition to the free trade agreement between Hong Kong and mainland China, Chinese Vice Premier Li Keqiang recently expressed the mutual importance of Hong Kong and mainland China to each other by stating that, among other initiatives, the Chinese government will encourage mainland-based enterprises to list in Hong Kong and will enable Chinese investors to invest in an exchange traded fund constituted by Hong Kong listed stocks. Companies seeking exposure to the rapidly growing Chinese market are well positioned to take advantage of such opportunities by going public in Hong Kong.

Nevertheless, the burdens and challenges of "going public" are not insignificant cant. The expenses of an IPO can be substantial. Significant reorganizations of a company's corporate and capital structures may be required before the offering. The listing requirements can also be quite stringent and the post offering duties of a public company can be demanding for even the most well managed companies.

Private Equity on the Map

Despite the advantages of going public, IPOs by shipping companies have been anemic for the past 18 months worldwide. In the absence of IPOs, the shipping industry must look to alternative sources or return to traditional financing options, such as the banks. However, the global credit crunch has limited the ability and desire of banks to lend as freely as in the past to shipping companies. Private equity may help fi ll the funding shortfall in the shipping industry, which some analysts have estimated to be as high as $30 billion over the next three years.

One key benefit of private equity is a more streamlined management structure with a better flow of information. A private equity-backed company often finds it easier to align the interests of managers and owners because there are fewer investors overall and the private equity investors usually have a better intimate understanding of the operations of the company. By contrast, a public company often invests significant amounts of time in communicating to a diverse group of shareholders and addressing potential conflicts between these shareholders and the management, as well as ensuring compliance with the various regulatory requirements imposed upon the company. Private equity funded companies are also not subject to the majority of the reporting or corporate governance arrangements of listed companies. The executives can more readily focus on the strategy of the business rather than on reporting requirements. An additional benefit is that when the private equity firm decides either to sell the company or bring it public in the future, investors are more likely to have confidence in the internal financials of the company given that it has likely been subject already to thorough due diligence by the private equity firm.

One of the most commonly noted downsides of private equity funding is that private equity investors generally have short-term investment horizons. The average length of time that private equity investors own companies usually ranges from three to five years. Such an investment approach may lead to short term rather than long term planning and decision making. Management of these companies is often asked to focus on cutting programs and staffing levels that are deemed unnecessary or inefficient.

With all of this in mind, however, there is a growing trend of shipping companies seeking private equity funding and private equity firms continue to seek opportunities in the shipping industry in Asia and elsewhere. In one of the more recent and well publicized examples of this, The Carlyle Group, one of the world's largest private equity firms, formed a joint venture in March 2011 with Tiger Group Investments and others, including Seaspan Corporation, that will focus on bringing together Chinese shipbuilders, lenders, and state-owned companies to support China's desire to increase the amount of cargo it controls. This joint venture deal, on which Blank Rome served as maritime counsel to The Carlyle Group, will deploy $900 million in equity funding over the next five years to acquire $5 billion of containers, tanker vessels, and other shipping assets.

Shipping assets will continue to be attractive to private equity firms as the maritime industry expands to meet the demands, especially in Asia, for natural resources and goods. At the same time, shipping companies are attracted to private equity as the recent market turmoil casts doubt on the availability of public listings as an option for raising significant funds. The valuations offered by private equity firms are at least as strong, if not better than, what is available through a public offering at this time. Private equity funds may, for now, serve as a life preserver for the shipping industry and may also be a driving force in Hong Kong and elsewhere in Asia, at least for the immediate future.

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