Value Partners snubs volatility to price high

The asset manager raises $376 million from its IPO, but Ping An buys nearly 40% of the deal, leaving few shares for others to fight over.
Solid demand allowed Hong Kong-based fund manager Value Partners to price its initial public offering at the top of the range despite volatile markets and a decline in several of its global peers just before or during its roadshow. This enabled it to raise the maximum HK$2.91 billion ($376 million) that it sought before its listing on the main board on November 22.

According to a source, the institutional tranche attracted orders for 160 times the amount of shares available after adjusting for the retail clawback and excluding the stake bought by Ping An Insurance. The retail portion of the deal was more than 110 times covered after seeing a good ôhit rateö from the one-on-one meetings held with fund managers in Asia and Europe. The management didnÆt visit the US given the small size of the deal.

With Ping An buying close to 40% of the deal, and 50% going to retail investors, there was only about $40 million left for other institutional shareholders. Ranked by an industry magazine as the second largest hedge fund manager in Asia, Value Partners has a good track record when it comes to seeking out and making money on undervalued stocks and is also one of the most profitable fund managers globally.

The small deal size was likely also a key reason for the absence of any form of price sensitivity in the book despite the fact that the local market is experiencing huge day-to-day swings that frequently exceed 1,000 points. Yesterday the Hang Seng Index (HSI) gained 1,362 points, or 4.9%, to 29,166 points, while the H-share index rallied 6.8% to 17,837 points. A day earlier the HSI had turned a 2.6% intra-day loss into a slight gain by the end of the session and on Monday it fell 3.9%. Value Partners invests primarily in the Greater China markets.

The price was fixed at HK$7.63, which marked the top of a range that started at HK$6.78. The offer comprised 381.6 million shares, or 23.9% of the company. All the shares were secondary. There is a 7.8% greenshoe that could boost the total deal size to $405 million if fully exercised.

JPMorgan and Morgan Stanley are joint bookrunners for the offering.

The final price values Value Partners at between nine and 13 times its estimated 2008 earnings, depending on which syndicate research report to believe. Because Value Partners generates about 80% of its revenues from performance fees, the earnings forecasts are highly dependent on what view one has of the market as a whole. In this case, JPMorgan is the more aggressive of the two.

According to one syndicate research report, other global alternative asset managers including Sparx Group, RAB Capital, Platinum, BlueBay and Fortress Investment Group, traded at an average 2008 price-to-earnings multiple of 14 times when the pre-marketing of Value Partners started. However, several of them have fallen since, in line with a sell-off among financial stocks in the US in particular, which should have made Value Partners less attractive on a relative basis, whatever the starting point.

As of yesterday, Tokyo-listed Sparx was quoted at 10.8 times its fiscal 2008 earnings (to March), RAB traded at 9.2 times its 2008 earnings, BlueBay was at 10.3 times its fiscal 2008 earnings (to June), and Fortress fetched at 2008 P/E multiple of 12.2, all according to Bloomberg data.

Among the key buying arguments were expectations of strong long-term performance in the Greater China stockmarkets, driven by healthy economic growth and continued liquidity flows, as well as the rising demand for wealth management services in Hong Kong.

Set up in 1993, Value Partners now has $5.7 billion under management and runs seven funds that are authorised by the Hong Kong regulators. While it has a preference for long-only investments, Value Partners is sometimes referred to as a hedge fund because it is allowed to go short and aims to deliver positive absolute returns whatever the direction of the market.

In 2006, Value Partners had an AUM margin (measured as net profit divided by assets under management) of 3.1% and a return on equity of 114%. It has also achieved a net earnings CAGR of 126% between 2004 and 2006. In the first half of 2007, its net profit reached HK$335 million, up 163% from HK$127 million in the first six months of 2006.
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