How a ‘Surefire’ Bet on Ant Group Has Trapped Global Investors Unconventional terms of a 2018 investment deal mean foreign money managers have to wait for Ant to revive its listing plans https://www.wsj.com/articles/how-a-...global-investors-11612875840?mod=hp_lead_pos6 How Ant’s Record IPO Plans Unraveled Days before Chinese fintech giant Ant Group was scheduled to go public in what would have been the world’s largest listing, regulators put plans on hold. WSJ’s Quentin Webb explains the sudden turn of events and what the IPO suspension means for Ant's future. Photo: Aly Song/Reuters Some of the world’s biggest investors were on the cusp of a multibillion-dollar windfall from their bets on Ant Group Co. Now they are stuck with shares that won’t pay off soon. In 2018, an exclusive group of global private-equity firms and mutual-fund managers including Silver Lake, Warburg Pincus LLC, Carlyle Group Inc. and T. Rowe Price Group Inc. took part in a coveted fundraising by Ant that raised $14 billion and minted the financial-technology giant as the world’s most valuable startup. More than $10 billion of the money came from international investors, which bought shares in an offshore shell company set up by Ant to raise funds in U.S. dollars. The unusual arrangement came about because in order to secure a payment license to operate Alipay, its highly popular mobile app, Ant had to be domiciled in mainland China. But that also limited the company’s ability to raise funds directly from foreign investors. The global investors agreed to terms that were highly favorable to Ant, and which limited their ability to cash out if the company didn’t end up going public, according to people familiar with the matter. Ant also didn’t provide a listing time frame or guarantee investors a return while it stayed private, the people added. The foreign investors didn’t receive any voting rights in Ant, which was valued at $150 billion in the June 2018 deal, the world’s largest-ever startup fundraising. None was given a seat on Ant’s board. The terms of Ant’s 2018 fundraising, which hadn’t been reported previously, show the pitfalls of taking stakes in popular startups that are able to dictate investment terms, and the regulatory unpredictability that comes with investing in Chinese companies. Last fall, as Ant neared the completion of blockbuster initial public offerings in Hong Kong and Shanghai that were on track to raise more than $34 billion, the international investors were poised to convert their holdings into Ant’s Hong Kong-listed shares at an over-80% paper profit. The IPOs valued Ant at more than $300 billion, and the foreign investors would be able to sell their shares after the company went public. Instead, the listings were called off in early November, after Ant’s controlling shareholder Jack Ma made a controversial speech that rankled Chinese regulators and top government officials. The deal’s cancellation closed the avenue for international investors to exit. The terms of Ant’s 2018 offshore fundraising had stipulated that if a share conversion didn’t take place upon Ant’s listing in mainland China or Hong Kong, the company would redeem the foreign investors’ shares, according to people familiar with the matter. That redemption would include a 15% compounded annual return from their date of purchase, the people added. However, those terms were specifically tied to Ant becoming a public company. There was no deadline stipulated for that event, people familiar with the matter said. In contrast, many other startups have granted their investors so-called “exit rights” that promise them payouts if the companies don’t list within a certain time frame. The 2018 Ant agreement also had no anti-dilution provisions, the people added, meaning investors could incur losses if the value of Ant’s business declines. “The deal was probably structured this way because Ant was absolutely the hottest startup at the time,” said Rocky Lee, an international partner at law firm King & Wood Mallesons who specializes in China tech deals. The global investors now face a difficult and uncertain path to profitability, as Ant has come under heavy pressure and criticism from Chinese regulators after expanding rapidly and allegedly taking advantage of regulatory loopholes to generate large profits. The Hangzhou-headquartered company is now preparing to overhaul its business to fall fully in line with Chinese financial regulations, a change that will likely crimp Ant’s profitability and growth prospects. Ant and Mr. Ma are hoping to win back favor with Chinese authorities, who will ultimately decide whether the company can revive its IPO plans again in the future. “Practically it means every investor has to patiently wait,” said Mr. Lee. “They have no right to demand an exit, they don’t even have board seats and there’s not much influence they can exert on the company as a minority shareholder. There’s really nothing they can do,” he added. Ant’s transformation into a more heavily regulated company is also likely to be a costly one. Iris Tan, a senior equity analyst at Morningstar, estimates Ant might be worth the equivalent of $162 billion if it converts into a financial-holding company. The company also could need to come up with 100 billion yuan ($15 billion) in funding for its consumer-lending business to comply with new rules, she said. Ant’s recent debacle could make some international investors think twice about buying stakes in hot Chinese startups in the future, though others believe there still is significant profit to be made in the sector. Baillie Gifford, a Scottish investment firm with more than $445 billion under management, invested $262 million in Ant during the 2018 offshore fundraising round, according to the company’s listing prospectus. “We are patient investors and don’t agitate for an IPO when investing in private companies,” a Baillie Gifford spokeswoman said. To be sure, investors wouldn’t have been able to predict that Ant would be barred from going public by Chinese regulators. “All the way until [Jack Ma’s] speech, the strong consensus was this company had a strong relationship with the government in a way that protected it from disruptive regulation,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics.