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The Deep Dive

Behind the eye-popping numbers of LG Energy's IPO

Institutional investors' no-limit betting blamed for inflated IPO valuations amid a lack of regulation

By Jan 21, 2022 (Gmt+09:00)

3 Min read

Behind the eye-popping numbers of LG Energy's IPO

The initial public offering of South Korea's LG Energy Solution Ltd. drew a record 11,500 trillion won ($9.65 trillion) in bids from institutional investors last week, an unprecedented amount for an IPO in a country where investment fund assets reached 850 trillion won in net worth as of end-2021.

It was the first time for the total amount of institutional bids for a domestic public offering to exceed the 10,000 trillion won mark, or more than 10 times the size of the fund market, reflecting investor fever for battery shares, alongside the take-off of electric cars.

But more importantly, industry watchers said the astronomical number for what is poised to become the country's largest-ever IPO this year was attributable in part to nonexistent money amid a lack of regulations.

In other words, small-sized asset management firms placed big bets on the IPO without having enough money, to raise their allotment chances in the highly subscribed IPO.

For example, an investment advisory firm with only 5 billion won in equity capital placed bids worth as much as 7 trillion won for LG Energy shares, or the maximum amount earmarked for institutional investors in aggregate in the $11 billion offering.

Under the securities laws, the advisory firm will be provided with up to 20 billion won worth of shares of the world's second-largest battery maker, based on its equity capital of 5 billion won. But its highest bid would result in more stocks being allocated to the company than other institutional bidders because stocks are allotted in proportion to their bids.

To apply for the IPO shares, however, there is no deposit required to be placed with the bookrunner.

"In the IPO market, honest means foolish," said an asset management company source.

NO ADVANCE DEPOSIT

In 2007, South Korea removed an advance deposit requirement for IPO subscriptions, with an aim to invigorate the IPO market. Now institutional investors are only required to make full payment for IPO shares received, at least a week before their market debut.

By contrast, retail investors must put down a deposit worth half of their bid amount to brokerage companies to subscribe to a public offering.

In the two-day bookbuilding last week, LG Energy attracted bids from a total of 1,988 institutional investors, including 1,536 South Korean institutions, resulting in the highest-ever competition rate of 2,023-to-one in the country's IPO market.

From retail investors, LG Energy Solution received a record 114 trillion won ($96 billion) in deposits this week. That means nearly one in every 10 South Koreans rushed to the brokerages handling the share sale to subscribe, or submitted bids online.

LG Energy Solution's EV battery system
LG Energy Solution's EV battery system


Investment companies blamed the lack of transparency in the share distribution process for their excessive bids for IPO shares.

Brokerage companies, or bookrunners, said that IPO shares are distributed only in proportion to the subscription amount because they have little time to assess the financial capabilities of institutional bidders. Namely, they are unable to tell whether the bidders have money to pay for the shares during a two-day bookbuilding process.

"We cannot help but leave it up to their conscience," said a leading Korean brokerage company's IPO manager. 

Despite investor complaints about institutional investors' competitive bids that ended up inflating IPO prices, financial authorities have yet to prepare countermeasures, which they fear might throw cold water on the IPO market.

LG Energy was priced at the top of its indicative range of 300,000 won to raise 12.8 trillion won ($11 billion). It will make its Kospi trading debut on Jan. 27.

Write to Jae-Won Park at wonderful@hankyung.com
Yeonhee Kim edited this article

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