Sliced Up and How: Ant Group IPO Fiasco Set to Cost Jack Ma Dearly

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As soon as Jack Ma chose to make those startling comments at the Shanghai Conference, in plain view of the Chinese regulators no less, poked the bear.

Well, the bear turned and trampled down Ant Group’s promising IPO, which has sustained its latest blow.

In the aftermath of the stopper on their IPO offering, Ant Group’s valuation is set to be slashed by over $150 billion.

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The new regulations proposed on micro-lending by the Chinese regulatory authorities are what constitute the fly in the ointment. Facing a huge downside in valuation, as a result, a steep drop in the pre-IPO price-to-book ratio could see Ant’s valuation undercut to that top global banks, making it more akin to them rather than the fintech giant that it originally is.

The development is in stark contrast to what was to be weeks prior when the promising projected pre-IPO market valuation was set at $315 billion. The shocking pullback of the listing is on the verge of making the company’s worth less than what it was a couple of years ago when it raised money from some of the world’s most eminent funds including Warburg Pincus LLC, Silver Lake Management LLC, and Temasek Holdings Pte.

Expressing their reservations on the heightened investor interest in the now-suspended $37 billion IPO, CBIRC has now released its preliminary set of draft rules (open and subject to change) which will monitor lending and frequent reporting. The top brass in China has long been pensive on online micro-lending companies and how they stand to impact investors and the public markets in the future.

The draft rules will see large online microlending companies will be supervised by central regulators instead of local bureaus. The rules have put a ban on regional banks from lending outside their provinces through online platforms, which in the past, have been the biggest users of the digital platforms to find borrowers outside their locale.

All in all, the sharp rebuke to Jack Ma is what has the Ant Group facing the music. Ma, Ant’s co-founder who controls 50.5% of its voting rights, has managed to permeate the lives of everyday Chinese citizens by enabling microloans. Embracing the use of big data to accurately assess borrowers’ credit profiles in order to identify the most creditworthy businesses and individuals, the crux of Ant’s fees earning strategy is providing a digital platform for banks to reach small borrowers and extend bite-sized loans.

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Another thing worth noting is that Ant Group has always proclaimed itself as a capital-light business. With the changes brought forth by the upper Chinese echelon, the move is going to hit Ant Group hard, compelling it to hold additional capital, which could go as far as 50 billion yuan ($7.56 billion) to 90 billion yuan under the joint funding proposal.

As it stands, there has been a joint lending model proposed by Beijing, whereby internet platforms should fund no less than 30% of total loans. However, the Chinese officials’ perspective, which sees growth in the micro-lending sector as a systemic risk, is expected to cause Ma and Ant Group more impediments in the future.

Soon after announcing the suspension of Ant Group’s IPO Jack Ma lost $3 billion in net worth. Now, after the estimated $150 billion cut in valuation of Ant Group, the net worth of Jack Ma is bound to tank like never before.

The situation, as it has unfolded, could well exacerbate. The very public fallout from the suspension of Ant’s IPO has the potential for damaging China’s reputation for sound management of capital markets and its financial hubs if a solution is not quickly worked out.

As for Ma and his 16-year-old Hangzhou based company, it will have to rebuild following granular instructions from the authorities. As of now, the future of what was set to be the world’s largest fintech company hinges on how it chooses to re-emerge from this debacle.

Stay tuned to this space for more updates.

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