Star street

Asian investors: In Asia, celebrity investors can help initial public offerings get off to a roaring start. This tradition may be great for first day trading, but not much else.

Consider Hong Kong’s current roll of stars – some official, some judiciously leaked. George Soros, the US billionaire, reportedly put $26m into the listing of Longfor. Hopu, a much-feted fund founded by Goldman Sachs bankers, is said to have bet $1.2bn on Minsheng Bank. Goldman itself is a pre-IPO investor in Sands Macau, the gaming group.

The practice has historical roots. When mainland Chinese firms first listed in Hong Kong, state-owned companies would recruit a local name, typically a tycoon such as Li Ka-Shing, to back their IPO. That helped market an effectively new asset class.

But cornerstones are now more cosmetic. The stars are usually offered a guaranteed block of shares at the market price, and must agree to a lock-up of, say, six months. The big names can take up to a third of the listed shares. Retail investors then follow in droves. Soros and Hopu may have applied for shares like everyone else, but their leaked interest serves the same purpose – to encourage less sophisticated investors to buy in.

Underwriters benefit by having fewer shares to sell on the day. They are often still paid for the whole equity issue, though clients sometimes argue the toss. First-day investors also have a chance to do well. Besides the gain from celebrity fever, fewer shares for the general public generally means more frenzied trading.

It’s harder to see what’s in it for companies themselves, besides kudos. Underwriting already frees companies from the risk of not getting their money. While some investments are strategic, or essential – Goldman’s investment in Sands saved the casino operator from a cash crunch – most offer little more than the prospect of a share overhang.

Nor does the market obviously benefit. The presence of famous investors may merely encourage Asia’s already overactive retail investors to skimp on research, exposing them to more risk than they bargained for. They should remember a golden rule of consumer goods: a celebrity ad may make a product fly from the shelves, but it won’t make it taste good.