Why the biggest IPO in history did not happen

3rd December 2020  

by Ascanio Orombelli

In Q3 2020, global reporters have started to anticipate Ant Financials idea to go on the market via an IPO. Ant is the operator of Alipay (Subsidiary of e-commerce giant Alibaba), a lifestyle and payments app with more than one billion users in China.

With the debut scheduled on November 5th, the company would have had the chance to: digitise Chinas service industry, drive domestic demand, expand globally through its e-commerce wallet partners in nine countries and finally invest in new technologies.

In order to prepare to the public markets debut, the firm had recently dropped its old brand Ant Financial” for Ant Group” to scale back its focus on in-house financial products. According to Techcrunch, a recent filing from Alibaba, which holds a 33% stake in Ant, showed that about half of Ants 2019 revenues came from technological infrastructure it provided to enterprise clients rather than proprietary financial products.

By the end of October 2020, it seemed that everything was ready for Ant to break global records for total funds raised, as the firm was apparently raising more than $34 billion with its coming listings, while earning a valuation well in excess of $300 billion, placing it among the worlds most valuable tech companies.

However, at the beginning of November 2020, The Shanghai stock exchange announced postponing Ant Groups colossal IPO, a day after Chinese regulators issued new fintech rules and requested Jack Ma and other top executives to a closed-door meeting.

Figure 1: The biggest IPOs of all time

What is Ant

Alipay, operated by Ant, was created in 2004 to facilitate transactions on Taobao, an Ebay-like marketplace based in China and managed by Alibaba. The volume of annual transaction through Alipay is bigger than both Visa and Mastercard, although the majority of Alipay transaction happen in China.

Figure 2: Annual transaction volume

The company is a pioneer of QR (Quick-Response) code payments, which are easily scanned with mobile phones or bar code readers and guarantee the completion of the transaction within seconds. Thanks to this method, the merchant only needs to print out a QR code to accept the payment with no additional hardware or infrastructure needed. In addition, users have the benefit of only having to show their QR code in order to process the transaction.

In addition to payments, Alipay offers many other functionalities to its users. People can use the service to shop on Taobao marketplace, they can invest in mutual funds, buy insurance policies, keep track of utility bills, borrow money and find deals from local businesses. Users can also receive Covid-19 updates and other healthcare informations. As for the variety of services offered, Ant defines itself not as a financial company, but more of a tech-solutions provider that connects individuals and small businesses with banks, asset managers and non-financial providers.

In the first half of 2020, the companys operating margin was around 34% according to WSJ, meaning that for every dollar it took in as revenues, the company made 34 cents of profit, before interest and tax payments.

Ants revenues come from two main sources: as people transact through Alipay, Ant receives fees from merchants and earns fees from banks and other financial firms making loans or selling investment products on its platforms. While Ant is a large and growing component of mobile payments, revenue from its digital finance platforms is rising faster.

Alipay has expanded abroad of Mainland China, going to Europe and US but the service is mostly adopted as a payment option for Chinese tourists outside of the country. Ant has also acquired stakes in overseas payment companies with digital wallets, providing some cross-border remittance services. Nevertheless, the vast majority of its revenue still comes from China.

What has happened

In past years, the Chinese government has shown a low tolerance for large private companies that have accumulated capital and power in the country and are perceived to have challenged both the laws and the stability developed within China.

Jack Ma said he wanted to help solve China's financial problems through innovation at an event held in Shanghai in October, and he criticised the increasingly tight financial regulation of the government for holding back technology growth. According to WSJ reporters, the Chinese government decided to stop Ant's IPO after these comments, even though investors around the world had already pledged more than $34 billion to Ant's shares.

The first disparity between Mr. Ma and the Chinese government dates back to 2008, when he was the CEO of Alibaba and lamented at a public forum that conventional Chinese banks overlooked companies that desperately needed financing. He said If the banks don't change, we will change the banks."

In 2013, at a public forum in Shanghai, Jack Ma targeted traditional Chinese lenders, saying that the country lacked a financial institution that could fuel China's economic growth over the next decade.

Alipay created an online money market mutual fund to help people earn investment returns on spare electronic cash sitting in their Alipay wallets, which proved to be a great success. Alipay and the other financial companies of Alibaba were folded into Ant Financial Services Group, the firm known today as Ant Group. With more than $250 billion under control by 2017, Ant's big money market fund became the largest of its kind in the world. China's securities regulators were worried about the possibility that the fund might build systemic and urged it to shrink and reduce its returns. As a result, Ant changed its strategy, allowing rival money managers to sell similar funds on Alipay to investors who wanted places to allocate their money, and its main fund shrank. Meanwhile, Ant raised three rounds of funding and was the world's most successful startup, worth $150 billion, by mid-2018.

As US-China relations with US President Trump worsened, Ma saw an opportunity as Beijing was eager to establish its own exchanges as the US threatened to de-list Chinese companies from the US stock markets. Chinese regulators saw a business like Ant listed as a significant endorsement of China's market in both Shanghai and Hong Kong.

All seemed ready for the biggest IPO to take place on the Chinese markets, but Mr. Ma pulled the hoe on his feet at a financial forum in Shanghai in October this year, where Chinese Vice President Wang Qishan and Central Bank Governor Yi Gang were among the attendees, along with senior state bank executives. He said that “there is no systemic risk in China's financial system, there is no system in Chinese finance." He attacked regulators saying "they focused only on hazards and ignored growth and development.” On Chinese social media, his remarks went viral, where some users thanked Mr. Ma for daring to speak out. Senior officials were not pleased at all with Mr. Ma's expressions in the talk in Beijing. The Chinese Financial Stability and Growth Committee met after Ma's speech and agreed to "regulate all kinds of financial activities and treat the same companies in the same way."

Regulators drafted a new rule that financial firms will now have to finance at least 30% of each loan they make in conjunction with banks, a requirement that was not present before.

The draft was released on Nov. 2, the same day that Mr. Ma and a few of his executives were invited to attend a meeting with banking, insurance and securities supervisory authorities, the central bank and foreign exchange regulators. The next day the Shanghai Stock Exchange suspended the IPO of Ant, citing the reasons for the meeting and changes in the regulatory climate.

Chinese regulators said that the regulation introduced was a "responsible move to protect investors and markets, that without would have otherwise severely limit Ants business scope and profitability.”

In the next months we will understand if Ant will try to reorganise its business units and rethink its business model, although this will cut consistently its valuation when trying to list again and probably the firm will not be able to raise as much money as it should have now, possibly dropping the chances to register the biggest IPO in history.