Goldman sits out mainland I.P.O. market
First Wall Street firm to get a mainland underwriting licence shuns lucrative listing market in favour of getting higher fees from taking Chinese firms abroad
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First Wall Street firm to get a mainland underwriting licence shuns lucrative listing market in favour of getting higher fees from taking Chinese firms abroad
Bloomberg in Hong Kong
15 December 2011
Goldman Sachs, the first Wall Street firm to win an underwriting licence on the mainland, is sitting out the world’s busiest initial public offering market.
The bank, No 3 globally in advising on listings this year, has managed only one offering on the mainland in three years, according to data compiled by Bloomberg, and three since it obtained its licence in 2004.
Goldman Sachs executives say that is because they want to avoid the risk of underwriting unproven companies, and that they face regulatory hurdles and have fewer employees than competitors. Instead, they are taking mainland firms public on overseas exchanges, where fees can be higher.
“You’ve got to be selective deciding how to allocate your resources,” said Cai Jinyong, 52, who heads Goldman Sachs’s investment banking business on the mainland and is chief executive of joint venture Goldman Sachs Gao Hua Securities.
“We focus on clients who have the potential to be a leader or already are leaders. We need to sell quality companies to investors.”
By forgoing deals on the Shanghai and Shenzhen exchanges, Goldman is missing out on a fee pool that ballooned to US$2.1 billion last year, from US$404 million five years earlier, according to New York-based consultancy Freeman & Company. Flotation commissions on the mainland were US$1.7 billion this year up to early December, about the same as New York, more than a quarter of the world’s total, Freeman data show.
Overseas listings of mainland firms generated US$399 million in the same period. Goldman Sachs analysts have forecast that the value of firms trading on mainland bourses will swell to US$41 trillion in 2030, surpassing the US as the world’s largest equity market.
Shenzhen, the smaller of the mainland’s two exchanges, is the busiest listing market in the world by number of deals, with 222 new listings this year, Bloomberg data show.
Mainland companies raised US$72 billion in domestic initial stock offerings last year, the most anywhere, and have sold US$40 billion of shares so far this year, second only to the US, with US$44 billion, Bloomberg data show.
“You just can’t afford losing out there,” said Josef Schuster, founder of Chicago-based IPOX Schuster, which oversees US$2.5 billion and invests in share offerings.
“Mainland China has the most active IPO market in the world, and behind the closed doors every bank is trying to get involved.”
Goldman Sachs executives say the firm can be a player on the mainland without leading in the local listing market. It is seizing opportunities in less risky areas, such as institutional brokerage and advising wealthy Chinese clients, they say.
The firm is also focused on expanding its business of making investments with its own money.
Goldman Sachs’ stake in Industrial and Commercial Bank of China, the world’s biggest bank by market value, has generated US$2.4 billion in revenue for Goldman since the purchase in 2006.
“We always take a gradual approach,” said David Ryan, the 42-year-old president of Goldman Sachs in the Asia-Pacific region, excluding Japan, and the regional head of investment banking.
“Given the challenges of finding the right people and getting them trained and integrated, we have to be very targeted using our limited resources rather than trying to pursue every piece of business.”
Goldman Sachs executives say they are working on 30 domestic Chinese offerings, including some awaiting regulatory approval, which would raise about US$40 billion.