Hong Kong was definitely the place to be for IPO lawyers who were prepared to ride the capital markets wave that hit the city in 2018.
The Asian financial hub is on track to top the global IPO market for the year, beating out its historical rival—New York. It achieved this financial feat largely because successful Chinese companies, such as smartphone maker Xiaomi Corp, chose to go public in Hong Kong this year.
And poised to enjoy the fruits of the record year are two U.S.-based global firms—Skadden, Arps, Slate, Meagher & Flom and Davis Polk & Wardwell—firms that have profited from the increased activity through a combination of fate and planning. Both firms worked on a record nine Hong Kong listings so far in 2018.
“This year was, by any measure, a standout year,” said Christopher Betts, a Hong Kong capital markets partner at Skadden. “I haven’t had a year that’s come even close to that.”
The Hong Kong Stock Exchange already raised an eight-year high of $35.1 billion as of Dec. 10, according to data compiled by Refinitiv, more than the New York Stock Exchange’s $27.8 billion and Nasdaq’s $23.2 billion. Hong Kong is expected to top $38.4 billion by the end of the year, according to a report by KPMG—that’s more than double what Hong Kong raised last year and is very likely going to be more than what was raised anywhere else in the world.
Winners and Losers
Despite the boom, the Hong Kong capital markets practice is notoriously competitive. Most global firms face fee pressures and fierce competition from local firms and, increasingly, from Chinese law firms. Shearman & Sterling, for example, saw most of its Hong Kong capital markets lawyers depart this year, with the bulk of the team jumping ship to join the Chinese firm Fangda Partners.
But a few firms, including Skadden and Davis Polk, managed to stand out and were able to capture much of the high-value work on the Hong Kong listings this year. They both benefited from changes in listing rules and from their respective expertise, lawyers say.
At the end of April, the Hong Kong stock exchange implemented new listings rules, largely to convince Chinese tech companies that they should list closer to home—across the border in Hong Kong rather than in New York.
The main rule change allowed weighted voting-rights (WVR) structures, enabling one set of shareholders—such as the founders—to have greater voting rights than others. This structure is largely favored by fast-growing startups but was not previously permitted by the Hong Kong exchange. In fact, it was the desire for exactly this type of structure that prompted Alibaba Group Holding Ltd., China’s e-commerce giant, to list on the New York Stock Exchange back in 2014 rather than in Hong Kong, even though the Asian city had been its first choice. Alibaba went on to raise a still-record $25 billion.
Even before the rule change, which has lured many Chinese companies to list in Hong Kong this year, Skadden had a stellar reputation for its work listing Chinese tech companies in the U.S. So it wasn’t hard for the firm to direct that expertise toward Hong Kong. “We’re very fortunate that we have the best U.S. practice in the market,” Betts said, naming partners Julie Gao, Haiping Li and Will Cai.
U.S.-qualified Gao, who heads up the firm’s China practice, is a well-known dealmaker and advised some of China’s most high-profile tech companies as they went public in the U.S., including e-commerce company JD.com Inc. and microblogging site Sina Weibo. Both listed on Nasdaq in 2014.
This year, Gao and Cai advised the billion-dollar U.S. listings of Chinese tech companies iQIYI Inc., a video streaming site that raised $2.4 billion, and electric vehicle startup NIO Inc. Gao also led the Skadden team on Chinese online group discounter Pinduoduo Inc.’s $1.6 billion IPO on the Nasdaq.
The firm’s strong reputation stateside helped the Hong Kong practice win mandates, including on Chinese selfie-app maker Meitu Inc.’s listing in Hong Kong, which was a big boost for the Hong Kong team, Betts said.
Together with Gao and Cai, Betts advised Meitu on a $629 million float in December 2016. It was the largest tech listing in Hong Kong in almost a decade—since the $1.49 billion IPO of Alibaba’s business-to-business arm, Alibaba.com, in 2007 (which delisted in 2012)—and it was a loss-making company at that. “That set the wheels in motion for other Chinese tech companies,” Betts said.
From there, Betts and Skadden went on to work on the ZhongAn Online P&C Insurance Co. Ltd.’s $1.5 billion listing, the first insurtech float; and tech giant Tencent Holdings’ $1.1 billion spin-off of its ebook unit last year. “It’s a track record that’s second to none,” said Betts, who joined the firm in 2012 from Paul Hastings.
All that led to the firm advising Xiaomi, one of the year’s hottest IPOs, whose 2018 listing is the world’s biggest tech float in four years, and also led to it advising Chinese e-commerce site Meituan Dianping. Both did multibillion-dollar IPOs with weighted voting-rights. “We basically created the blueprint for [WVR] deals,” Betts said.
The Hong Kong stock exchange made another major listing rule change this year, permitting pre-revenue biotech companies to go public in Hong Kong. This had not been allowed previously, and the change was fortuitous for Davis Polk, which had developed a specialization in biotech back in the U.S.
Bonnie Chan, a Hong Kong capital markets partner at Davis Polk, recognized that the rule-change offered an opportunity for the firm. Biotech expertise in Hong Kong was very limited, but she believed Davis Polk could fill the void and capitalize on the change.
Chan and her capital markets team sought help from their colleagues in the U.S., who came out to Hong Kong and shared their biotech listings expertise.
Soon, Chan, a former senior vice president and head of the IPO department for the Hong Kong Exchanges and Clearing Ltd., was the one doing the teaching. In March, a month before the listing rule change went into effect, she, along with partner James Lin and counsel Yang Chu, spoke at a seminar co-hosted by the Hong Kong stock exchange in Shanghai and Beijing about pre-IPO for biotech companies.
Davis Polk went on to work on two biotech companies’ Hong Kong listings as underwriters’ counsel: Nasdaq-listed early-stage Chinese cancer drug maker BeiGene Ltd., on its $903 million dual-primary listing—also a first under the new listing rules—and Innovent Biologics Inc. on its $421 million float—the biggest biotech IPO in Hong Kong this year. Skadden advised the issuers on both deals.*
“I had a very clear goal at the beginning of the year with the new listing rules coming out,” she said. “We had to position ourselves to do at least one WVR deal and one biotech deal. We needed to make a mark in the market, [showing] that we know how to do the rules.”
The firm did just that. In addition to its roles on the BeiGene and Innovent Biologics deals, it was counsel for the underwriter on the $4.2 billion Meituan IPO.
“It’s a winner-takes-all market. You either know how to do it or you don’t, and the more you do it the better you are,” Chan said. “If you don’t keep doing, you lose out.”
*Updated 12/12: This story has been updated to include Skadden’s roles on the listings of BeiGene and Innovent Biologics.