Jack Ma’s Ant Group changes from windfall to nightmare for its global investors

Two months ago, global investors were on the verge of accepting a windfall of the largest initial public offering in the world. Now, returns on the hundreds of millions of dollars invested Ant group is in jeopardy.
China has ordered Ant to re-examine its fintech businesses – ranging from wealth management to credit lending and insurance – and return to its roots as a payment service.

The central bank’s statement on Sunday was short on details, but it poses a serious threat to the growth and most profitable operations of billionaire Jack Ma‘s online finance. Regulators stop asking directly for an explanation of the company, but stressed that it is important that Ant ‘understands the need for the refurbishment of his business’ and said that he should come up with a plan and timetable as soon as possible. must come.
Authorities also complained to Ant about subparr corporate governance, disregard for regulatory requirements and the exercise of regulatory arbitrage. The central bank said Ant was using its dominance to exclude competitors, harming the interests of its hundreds of millions of consumers.
Ant said in response that he would set up a special team to meet the demands of the regulators. It will maintain the business operations for users, and promises not to increase prices for consumers and financial partners while increasing risk control.
The director added that the Hangzhou company must set up a separate financial holding company to comply with the rules and ensure that it has sufficient capital.
Here are some scenarios from investors and analysts about what the restructuring might look like:
Optimists believe that regulators are just repeating their right to oversee the financial sector of the country and sending a warning to the internet businesses without intending the drastic change.
Beijing could try to set an example of Ma’s Ant, the largest among a series of new but ongoing fintech platforms. Previous repression of this nature has struck companies in the short term and left them mostly intact. Social media giant Tencent Holdings Ltd.became, for example, a prominent target of a campaign to combat child play addiction in 2018. Although the shares suffered a setback, they eventually peaked again.
Ant’s branch, Alibaba Group Holding Ltd, has also regained investor confidence after short-term sales due to accusations by authorities over everything from traders’ unfair pressure to the blind eye to counterfeiting on its e-commerce platform.

“I do not think regulators are thinking of breaking Ant, as no fintech company in China has a monopolistic status,” said Zhang Kai, an analyst at analytics firm Analysys Ltd. ‘The law is not only aimed at Ant, but also at a warning to other Chinese fintech companies. ‘
Some see this as an opportunity for Ant. With the industry as a whole for tougher supervision, Ant has more resources to meet the challenges as an industry leader, Zhang said.
A more worrying outcome would be if regulators moved to break Ant Group. This would complicate the structure of the shareholders and harm the fastest growing business.
Ant had a value of about $ 315 billion before its initial public offering was discontinued, which corrected investments from the world’s largest funds. Among them: Warburg Pincus LLC, Carlyle Group Inc., Silver Lake Management LLC, Temasek Holdings Pte and GIC Pte.
Global investors backed the company when it was valued at around $ 150 billion in the last round of fundraising in 2018. A breakup would make the returns on their investments uncertain, with the timeline for a stock market to be paid in November the distant future.
The government could ask Ant to eliminate its more lucrative operations in wealth management, credit lending and insurance, and offload it into a financial holding company that will get tougher scrutiny.
“The emerging reality is that China’s regulators are adopting similar regulations as banks and fintech players,” said Michael Norris, research and strategy manager at Shanghai-based advisory firm China.
Ant’s payment business alone leaves much less to the imagination. While the service handled $ 17 billion in one year, online payments are largely unprofitable. The two largest mobile payment operators, Ant and Tencent, have heavily subsidized the businesses and used them as a gateway to win users. To make money, they used the payment services to cross-sell products, including wealth management and credit loans.
“Ant’s growth potential will be limited by focusing on its payment services,” said Chen Shujin, head of China’s financial research at Jefferies Financial Group Inc. in Hong Kong. “On the continent, the online payment industry is saturated and Ant’s market share has almost reached its limit.”
The worst case scenario would be that Ant would give up its money management, credit and insurance businesses and stop its operations in the units that serve half a billion people.
Its wealth management business, which includes the Yu’ebao platform that sells mutual funds and money market funds, accounted for 15% of revenue.
Credit tech, which includes Ant’s Huabei and Jiebei units, was the largest revenue for the group and contributed 39% of the total in the first six months of this year. It has made loans to about 500 million people.
The outcome would be supported by the idea that China’s leaders have become frustrated with the swing of technology billionaires and want to learn a lesson by killing their businesses – even if it means short-term pain for the economy and markets.
China’s private sector has maintained a delicate relationship with the Communist Party for decades and has only recently been recognized as central to the country’s future. Many commentators attributed the recent repression of fintech companies to remarks made by Mom at a conference in October, when he described the attempts to curb the emerging field as short-sighted and outdated.
Between them, Alibaba, Ant and Tencent in November ordered a combined market capitalization of almost $ 2 billion, which the state controllers such as Bank of China Ltd. surpassed as the country’s most valuable companies.
The trio has invested billions of dollars in hundreds of emerging mobile and internet companies, gaining the status of royalty in the world’s largest smartphone and internet market by users.
‘The Communist Party is the end-and-all-in-China. It controls everything, ”he said. Alex Capri, a research fellow in Singapore at the Hinrich Foundation. “There is nothing that the Chinese Communist Party does not control, and anything that seems to be moving out of its way in any way is going to be withdrawn very quickly,” he said, adding: “we can expect to see more of that.”