Prada has raised HK$16.7 billion ($2.1 billion) from its Hong Kong initial public offering after pricing its shares in the bottom half of the range at HK$39.50 each early Friday morning.

This secured its position as Hong Kong’s largest listing so far this year, as well as the largest ever consumer product IPO in the Hong Kong market ahead of shoe maker and retailer Belle International’s $1.27 billion offering in 2005.

Even so, the deal failed to live up to its own hype, particularly with regard to retail interest, and the final deal size is half a billion dollars below the $2.6 billion that the Italian fashion designer was targeting at the top of the price range.

A lot of that was due to the deterioration in global equity markets and another couple of disappointing trading debuts in the Hong Kong market while Prada was on the road, which made investors cautious about getting involved. Many have lost a lot of money as 13 of the 15 Hong Kong IPOs above $100 million this year are currently trading below their issue price. Others are believed to have been put off by the fact that investors, under current regulations, have to pay capital gains tax if they sell their Prada shares at a profit.

According to a source, hedge funds were becoming increasingly price sensitive as the Hang Seng Index fell every day but one during the nine-day roadshow, losing a combined 4.3%, and when Samsonite International fell 7.7% in its debut last Thursday some even withdraw their orders. However, there was still long-only demand up to the mid-point of the HK$36.50 and HK$48 range, and when the bookrunners put out guidance the day before pricing, saying the price would be fixed within a narrower range between HK$39.50 and the earlier mid-point of HK$42.25, the quality of the order book was said to have improved significantly as more quality names came in and price sensitive hedge funds fell out of the equation. In the end, about 70% of the institutional tranche was allocated to long-only investors.

Retail investors were not convinced, however, and the 10% retail tranche was just half covered when this portion of the deal closed at noon on Thursday. Some retail investors were said have cancelled their margin financing on the final day as they worried about getting a 100% allocation, which would make it difficult to pay off the loan. This was in sharp contrast to the belief that the Hong Kong public, which loves shopping and is particularly keen on overseas brands, would jump at the opportunity to invest in one of the world’s top luxury designers. The company had even sought a clawback waiver from the Hong Kong stock exchange to cap the size of the retail tranche at 25% as opposed to the usual 50% in case of strong demand.

However, the current market environment clearly outweighed their usual enthusiasm for consumer product stocks, and instead shares intended for retail investors had to be reallocated to the institutional tranche, leaving just 5% of the deal in the hands of the Hong Kong public.

The muted response is likely to be a disappointment to Prada, which tried to stir interest in its brand by putting on a full-fledged fashion show for institutional and high-end retail investors in Hong Kong when it kicked off the offering. International consumer brands might not be quick to follow in Prada’s footsteps, since one of the key draws of going public in Hong Kong is the liquidity created by an active retail investor base — which Prada showed is not a certainty.

On the other hand, Prada did manage to complete the IPO and it did so at a premium valuation to some of its peers that are traded in Europe. And that is not a bad feat in a declining market — especially not for a company that has failed to list in its home town of Milan several times in the past 10 years.

Some observers noted that the decision to price at the bottom of the guidance range given on Thursday took into account a lot of concerns currently in the market, such as the debt crisis in Europe and China’s ability to control its inflation, and that might work in Prada’s favour when it starts trading on Friday. However, if its key comps continue to fall between now and then, the share price may still come under pressure.

The final price of HK$39.50 translates into a price-to-earnings multiple of 23 times for the fiscal year ending in January 2010, which compares with a 2011 P/E ratio of 18.3 times for LVMH Moet Hennessy Louis Vuitton. Other high-end retailers like Tod’s, Tiffany and Burberry are also trading at P/Es ranging from 19.4 times to 22.2 times.

Analysts argue that Prada deserves to trade at a premium to LVMH because of its greater growth prospects — it currently has only 207 Prada stores, compared with LVMH’s 451 stores — and because its portfolio contains only premium brands. Aside from the Prada brand, which account for 79% of sales, it also owns the Miu Miu brand, which caters to younger customers, and the two shoe brands Church’s and Car Shoe.

Prada plans to open 80 self-operated stores this year across its four brands to add to the 319 stores it had at the end of January. According to the prospectus, 25 of the new stores will be in Asia Pacific, but it is also aiming to expand into the Middle East and other rapidly growing markets where it currently doesn’t have a presence, such as Brazil and Russia.

LVMH fell 4.4% during Prada’s roadshow. French cosmetics and skincare company L’Occitane International, which was the first non-Asian consumer products company to list in Hong Kong last year, dropped 4.5%.

Sources said Prada’s institutional tranche was about three times covered with about 20% of the demand coming from Asia, 30% from Europe and 50% from the US, which is home to a large number of global consumer funds. About 200 institutional investors participated in the deal.

Prada sold 423.3 million shares, or 16.5% of the company. Of the total, 86% were secondary shares sold by co-founders Miuccia Prada and her husband Patrizio Bertelli, who owned 94.9% before the IPO. The remaining 14% were new shares.

CLSA and Goldman Sachs were joint bookrunners together with Italian banks Intesa Sanpaolo and Uni Credit.

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