The Fallout From Ant Group’s Collapsed IPO

November 9, 2020 Updated: November 11, 2020

Commentary

Ant Group, China’s shiniest fintech star, was all set to raise a record-setting $37 billion in an initial public offering—before everything disintegrated in a matter of days.

Ant’s IPO blowup shocked all involved parties, except perhaps those within the highest echelons of the Chinese Communist Party (CCP). From the wreckage of Ant’s share sale, we can draw a few conclusions about the CCP’s current regulatory regime, the investment environment going forward, and what’s next for the company and its advisers.

The fintech giant’s IPO was supposed to debut in Shanghai and Hong Kong on Nov. 5. Jack Ma, Ant’s founder and former Alibaba founder and executive, and a few executives were summoned by regulators to Beijing on Nov. 2. A day later, the IPO was called off by Chinese regulators.

So what had happened? 

Most China watchers say the CCP was angered by Ma when he decided to launch a stinging attack on Beijing regulators at a financial conference the previous week in Shanghai. Ma accused China’s financial regulatory system of being antiquated and stifling innovation, with many regulators in attendance.

Ma also said traditional banks—many are government-owned—held a “pawn shop” mentality, for requiring collateral from borrowers instead of using big data and artificial intelligence to assess risk, which Ant does with its proprietary technology.

Those blunt words from Ma stunned Chinese regulators and CCP officials. The CCP brass set out to rein in Ma and, acting with shocking speed, scuttled Ant’s IPO.

Shortly following Ma’s apparent criticism, Beijing put out a few op-eds from scholars warning technology companies against excessive risk-taking. Regulators increased scrutiny over Ant’s business model. According to Reuters, regulators for years had been looking to rein Ant in due to its disruption of the traditional banking business model, and with sign-off from Vice Premier Liu He, the regulators finally had the green light to cut Ant down to size.

On Nov. 2, Ma and several Ant executives were summoned to Beijing to meet with the central bank and two other key regulatory bodies. The very next day, revised regulatory rules governing micro-lending businesses were released, rendering Ant’s existing business model potentially in violation of the laws. Shanghai immediately pulled Ant’s pending IPO listing; Hong Kong shortly followed suit.

The largest IPO in history disintegrated in less than a week.

Back to the Drawing Board

The draft rules released Nov. 3 require micro-lenders such as Ant to put up at least 30 percent of any loan they originate jointly with banks. According to Ant’s IPO prospectus, only 2 percent of its existing loans as of June 2020 were funded from its own balance sheet.

The new rules could force a rethink of Ant’s entire business model. Facilitating loans is roughly 40 percent of its existing business, and currently, it acts as a middleman to match borrowers against traditional banks. It could take months, if not years, for Ant to alter its business model and come back to the market. And if Ant has to utilize its own balance sheet, it dramatically changes the company’s revenue and earnings profile, potentially costing Ma and other investors billions of dollars in valuation. 

Some insiders within Ant hoped that there could be changes to the draft regulations, including requirements on funding, according to Reuters. They are betting that the CCP merely wanted some theater to show Ma and Ant who’s the boss and that any dissent from the Party line wouldn’t be tolerated. And that once this sinks in among all stakeholders, the IPO would be allowed to continue.

Proving Ma’s Point

Beijing’s actions this month have differed from their usual playbook. Regulators in the past would have left Ma alone, given his wealth, his stature as one of China’s foremost entrepreneurs, and his close ties to CCP officials.

Not this time. Ma’s Oct. 24 speech was apparently a bridge too far. And the subsequent move by Beijing underscored perhaps a shift in the government’s changing priorities. Tightening financial regulations and de-risking China’s sprawling financial sector—in light of a global pandemic—may be paramount to CCP authorities.

But decisions like this also underscore how capricious Beijing regulators can be and that China’s capital markets still don’t belong in the big leagues. What global investors value above all are predictability and consistency.

Regulators have been investigating online micro-lenders for years, and rightfully so. They don’t require the same collateral as banks, and it’s correct to argue that they should. However, the suddenness and the heavy-handedness of the regulatory action—just two days before Ant’s much-anticipated IPO—proves that China’s regulatory regime is still immature.

Investors had already committed $34 billion to the IPO, and bankers were in the process of collecting those funds. Now, the banks must return the cash to the subscribers. No investor lost money, but this type of pivot is awkward and unheard of.

What else can go wrong beyond Ant’s IPO? China’s offshore dollar bond market’s so-called “keepwell clause,” which implicitly guarantees repayment in the event of default. It’s technically illegal, but mainland Chinese courts have ruled both in favor and against the enforcement of this clause in separate cases. Foreign investors shouldn’t depend on consistent application of this agreement going forward.

Ant’s bankers, including Citigroup, JPMorgan Chase, Morgan Stanley, and China International Capital Corp., were set to have a massive windfall with hundreds of millions of dollars in potential fees. Ant was estimated to pay up to 1 percent of the proceeds in total fees, according to regulatory filings. But the halted IPO wiped out their paydays, and it’s unclear whether the banks would be paid a nominal fee for the work they’ve performed leading up to the IPO. 

“Those investment banks and others managing this IPO seem to have been blinded by the big fees and forgotten about the capriciousness of the Chinese Communist Party and the special risks inherent in dealing with an authoritarian police state,” said Roger W. Robinson Jr., president and CEO of Washington-based research and risk consultancy RWR Advisory Group. “Those that think of China as just another country do so at their peril.”

Investors should be warned that any law can be broken or altered at will by the CCP. And it can happen without warning. It even happened to Jack Ma, China’s richest man.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.