Can’t face waiting for the Alibaba mega-listing? Don’t worry, investment bankers have got you covered.
Though the initial public offering of the Chinese ecommerce group – which promises to be one of the largest in history – is now in motion, some hedge funds in Hong Kong have already been loading up on synthetic shares, sold by investment banks as certificates.
The process involves taking one of Alibaba’s two biggest shareholders – Yahoo or SoftBank – evaluating their constituent parts, and then using short positions to remove everything that the company owns other than its Alibaba stake. Yahoo holds 24 per cent of Alibaba, while SoftBank owns 37 per cent.
SoftBank also has holdings in Sprint, Yahoo Japan, and lots of smaller listed companies such as Supercell, GungHo and Zynga. The rest of the business – most notably its core mobile phone business – can then be cancelled out by shorting the nearest economic equivalent, such as KDDI.
Those familiar with the process say that hedge funds began asking for some form of synthetic Alibaba shares about six months ago, partly as a way to capture the potential rise in valuation expectations as the company got closer to listing.
In future, the same structure could be used to hedge exposure to the Chinese ecommerce giant for investors wanting to lock in the valuation at listing, said one banker, although nobody has yet taken on that trade. Such strategies have been used in the past to gain exposure to a single part of a listed conglomerate.
One hedge fund manager said the process was simple, and questioned why investors would need a bank’s help. “You can do the whole thing yourself … a lot cheaper,” he said.
Some funds were able to buy into the company in previous financing rounds, or through Alibaba’s 2012 convertible bond issue. For those that missed out, these synthetic shares offer an alternative way in.
These certificates imply that Alibaba has a market capitalisation of $83bn. However, estimates keep rising – with some suggesting that the company could be worth as much at $200bn. Recent trades in the Alibaba convertible bonds imply a valuation in the region of $120bn.
Shares in both Yahoo and SoftBank have rallied over the past 12 months, partly thanks to fevered appetite for exposure to Alibaba ahead of the IPO. Yahoo is up 80 per cent, compared with a 33 per cent rise in the Nasdaq, while SoftBank has more than doubled.
The Alibaba listing could be the largest to date, with some people familiar with the process saying it may raise as much as $25bn, topping the $22bn record set by Agricultural Bank of China in Hong Kong in 2010.
Even though the company is likely to pay just 2 per cent fees for its IPO, the five investment banks managing the deal are still likely to divvy up more than $400m. The 2 per cent fee level is in line with the Hong Kong average, but just half the norm for a US listing.