Ant Turning From Windfall to Nightmare for Its Global Investors

(Bloomberg) - Two months ago, global investors like Warburg Pincus, Carlyle, Temasek and GIC were on the verge of the massive slump in the world's largest IPO.
Now the returns on the hundreds of millions of dollars they invested in Ant Group Co. are at risk. On Sunday, China ordered Ant to re-examine its fintech businesses - from wealth management to consumer lending to insurance - and return to its roots as a payment service provider.
The central bank's statement, though limited in detail, posed a serious threat to the growth and most lucrative operations of billionaire Jack Ma's online financial empire. Regulators did not ask directly to wind up the company, but insisted it was important to that Ant "understands the need to overhaul their business" and urged the company to come up with a plan and schedule as soon as possible.
The authorities also berated Ant for underperforming corporate governance, disregarding regulatory requirements and engaging in regulatory arbitrage. The central bank said Ant used his dominance to shut out rivals and harm the interests of its hundreds of millions of consumers.
Ant responded that it would set up a dedicated team to cater to regulatory requirements. It will keep business operations going for users and promises not to raise prices for consumers and financial partners while tightening risk controls.
The Hangzhou-based company must set up a separate financial holding company to comply with regulations and ensure it has sufficient capital, regulators added.
Here are some scenarios from investors and analysts of what the restructuring might look like:
According to optimists, the regulators are merely reaffirming their right to oversee the country's financial sector and sending a warning to the internet companies with no intention of drastic change.
Beijing could try to take an example from Ma's Ant, the largest of a number of new but ubiquitous fintech platforms. Previous raids of this type have dealt short-term blows to companies and left them largely unscathed. For example, the social media giant Tencent Holdings Ltd. in 2018 a key target of a campaign to combat child gambling addiction. While its stocks did well, they eventually rebounded to all-time highs.
Ant's subsidiary, Alibaba Group Holding Ltd., also regained investor confidence after short-term sell-offs after authorities raised allegations ranging from unfair pressure on merchants to counterfeiting on its e-commerce platform.
"I don't think regulators are thinking of breaking up Ant because no fintech company in China has a monopoly," said Zhang Kai, an analyst at research firm Analysys Ltd. "The law is aimed not only at Ant, but at sending too." a warning to other Chinese fintech companies. "
Some see this as an opportunity for Ant. As the industry as a whole faces tighter oversight, Ant has more resources to face challenges as an industry leader, Zhang said.
A more worrying finding would be if regulators were to liquidate the Ant Group. This would complicate the shareholder structure and damage the company's fastest growing business.
Ant was valued at roughly $ 315 billion before going public and has garnered 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 its final donation round in 2018. A split would make the return on their investments uncertain as the schedule for an IPO, which was due in November, is now being postponed to the distant future.
The government could ask Ant to outsource its more lucrative asset management, lending and insurance activities and move them to a financial holding company that is under scrutiny.
"The emerging reality is that China's regulators are enacting similar regulations against banks and fintech players," said Michael Norris, research and strategy manager at Shanghai-based China consultancy.
Ant's payments business alone leaves much less to the imagination. While the service processed $ 17 trillion in transactions in one year, online payments were largely loss-making. The two largest wireless carriers, Ant and Tencent, heavily subsidized the companies and used them as a gateway to attract users. To make money, they used the payment services to sell cross-sell products like asset management and lending.
"Ant's growth potential will be limited by returning the focus to its payment services," said Chen Shujin, a Hong Kong-based director of Chinese financial research at Jefferies Financial Group Inc. "The mainland is saturated with online payments, and Ants Der Market share has pretty much reached its limits. "
Worst of all, Ant would forego its money management, lending and insurance businesses and cease operations in the units that serve half a billion people.
The wealth management business, which includes the Yu'ebao platform that sells mutual funds and money market funds, accounted for 15% of sales.
Credit Tech, which also includes Ant's Huabei and Jiebei units, was the group’s largest sales driver, contributing 39% of total sales for the first six months of this year. It made loans to around 500 million people.
That finding would be backed up by the idea that China's leaders are frustrated with the boast of tech billionaires and want to teach them a lesson by killing their businesses - even if it means short-term pain for the economy and markets.
China's private sector has had a delicate relationship with the Communist Party for decades and was only recently recognized as central to the country's future. Many commentators have attributed the recent crackdown on fintech companies to remarks Ma made at a conference in October when he dismissed attempts to contain the burgeoning field as short-sighted and obsolete.
Alibaba, Ant and Tencent had a combined market cap of nearly $ 2 trillion in November, outperforming state giants like Bank of China Ltd. as the most valuable companies in the country.
The trio has invested billions of dollars in hundreds of emerging mobile and internet companies to achieve kingmaker status in the world's largest smartphone and internet market.
“The Communist Party is the be-all and end-all in China. It controls everything, ”said Alex Capri, a Singapore-based research fellow with the Hinrich Foundation. "There is nothing that the Chinese Communist Party does not control and anything that appears to be twisting out of orbit in any way is being withdrawn very quickly," he said, adding, "we can expect to see more of this. " The."
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