Brokerages reap big gains as investor-cum-underwriters

South Korean brokerage companies have been criticized for inflating corporate value and IPO prices to boost their underwriting fees. Now they are under fire for doing the same thing to maximize returns as investors, too.

Over the past few years, domestic brokerage firms have ramped up their investments in startups or unlisted small-sized companies, which boosts their chance of winning their IPO mandates.

As a company's investor and IPO manager, they are inclined to place a higher value on it than their previous estimate -- at which they had invested in the firm --  thereby enjoying hefty valuation gains. Once their lock-up of up to six months is lifted, they are able to realize the gains.

“Most of the latest IPOs, for which their offering prices were adjusted upward, were underwritten by their investors, which are blamed for inflating the offering prices," said a brokerage industry insider.

Korean brokerages are estimated to book valuation gains from domestic IPOs, having taken place this year and managed by the brokerages, worth tens of millions of dollars in aggregate, according to industry sources on April 8.

KOREA INVESTMENT & SECURITIES

Korea Investment & Securities Co. led the pack. It has earned valuation gains of about 20 billion won ($16 million) year to date from three domestic IPOs, companies in which it has directly invested.

The bulk of the estimated gain comes from Yuil Robotics Co.. which debuted on the Kosdaq market last month. Korea Investment lead-managed the IPO of the industrial robot company, in which it secured a 9.42% stake back in April 2020.

Its offering was priced at 10,000 won last month, above its price band of 7,600-9,200 won thanks to strong institutional demand.

The stock has more than doubled to hover around the mid-20,000 won range, putting the value of Korea Investment’s stake at 12.5 billion won based on the April 8 closing price. That translates into about 10 billion won in valuation gains, on top of the underwriting fees of 800 million won it received from Yuil Robotics.

Once its lock-up is lifted on April 18, the brokerage firm can unload the shares.

MIRAE ASSET SECURITIES

Mirae Asset Securities Co. is poised to pocket millions of dollars from 4by4 Inc.’s IPO due later this month. In September 2021, it bought 1 billion won worth of shares in the video content creator for 9,200 won per share.

As its IPO underwriter, Mirae proposed between 11,000 and 14,000 won per share for 4by4’s public offering, or 19.6-52.2% above the company’s initial guidance.

After its six-month lock-up is released, the brokerage company will be allowed to cash out of the shares, which will likely generate around a 20% return from the startup. The IPO is expected to take place in the first half of this year.

In some cases, however, the investor-cum-underwriter role has not worked out.

In 2020, Korea Investment tried in vain to more than quadruple the corporate value of Panasia Co., a ship component manufacturer., in which it had invested a year earlier.

For its IPO, the brokerage house suggested 47,000 won per share based on an enterprise value of 840 billion won. That compared with the 11,250 won per share at a corporate value of 200 billion won, at which it had bought its shares in 2019

But its high valuation led to the company’s withdrawal of its IPO.

Startups and small-sized companies are excluded from current laws that prohibit financial services firms from underwriting an IPO of a company in which they have more than a 5% stake.

Sticking to the rules, brokerage companies must limit their ownership to 5% in IPO candidates, or chase startups and unlisted companies as investment targets.

“Unless their investor-cum-underwriter roles are brought under control, upcoming IPOs will continue to boost brokerage companies’ profits,” the industry official warned.

Write to Ye-Jin Jun at ace@hankyung.com
Yeonhee Kim edited this article.