FUND RAISING: Alibaba’s Ant Chases New Funds in March to IPO

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Bottom line: Domestic buyers are likely to comprise most of the investors in Ant Financial’s latest fund raising, though the use of foreign advisers indicates some overseas participation may also be allowed.

Ant Financial raises new funds

Ant Financial, the financial services arm of e-commerce giant Alibaba (NYSE: BABA), is going back to investors for a new mega fund-raising, just a year after taking money from private investors for the first time. But any foreigners hoping to buy into Ant will probably be disappointed, since it appears this new funding round will be mostly open to Chinese institutional buyers. Likewise, Ant’s IPO that could come as soon as next year is likely to happen on one of China’s domestic stock markets, again locking out foreign investors.

Perhaps it’s only fair that foreign investors stand on the sidelines in Ant’s high-growth story, since such investors already have easy access to some of China’s top private companies that are listed overseas. By comparison, domestic Chinese investors have little or no access to shares of Alibaba, Baidu (Nasdaq: BIDU) or Tencent (HKEx: 700), even though that trio of corporate giants derive nearly all their money from China’s booming Internet market.

According to the latest reports, Ant is currently in talks to raise up to 20 billion yuan ($3.1 billion) in what would be its second funding round. (English article; Chinese article) The reports say the funding could value Ant at more than $50 billion, and it aims to close the round sometime next month. The latest value would compare with $35-$40 billion in Ant’s first fund-raising about a year ago, meaning its value has crept up by a healthy but not earth-shattering 33 percent over the last year.

There’s not much detail on who will invest in this new round, though one company mentioned is an investment unit of China Construction Bank (HKEx: 939; Shanghai: 601939), one of China’s top 4 state-run lenders. Others could include big Chinese insurers and other institutional funds. Reports at the time of Ant’s first fund-raising last year indicated Postal Savings Bank, the bank connected to China’s post office, and policy lender China Development Bank, were among investors who purchased about 11 percent of Ant Financial at the time. (previous post)

It seems somewhat ironic that Ant is hiring foreign firms Goldman Sachs and JP Morgan as advisers for the fund-raising, alongside China’s oldest investment bank CICC. Perhaps that means we’ll see some foreign participation in this upcoming round, though Chinese laws restricting foreign ownership of such financial services companies might severely limit or even rule out such a possibility.

The fact is that Ant’s very existence as a separate company actually stems directly from China’s restrictive laws over foreign ownership of financial services companies. The unit was previously part of Alibaba, but then was split off after US Internet giant Yahoo (Nasdaq: YHOO) purchased 40 percent of Alibaba in 2005. Following that split, Alibaba founder Jack Ma and other top company managers remained Ant’s major stakeholders.

Electronic Payment Roots

Ant’s largest and oldest asset is its Alipay electronic payments service, which is China’s largest private operator and increasingly competes with former state monopoly UnionPay. But Ant also has a number of other promising businesses, including Yu’ebao, an investment product where Alipay users can park idle funds from their accounts to earn interest. Ant is also part owner of a new Internet bank that is part of a pilot program by Beijing to open up the banking sector to more private investment.

Yet another Ant Financial product was in the headlines this week, as media reported the company was close to launching a new credit rating product that draws on Alipay’s reams of financial transaction data. That product, Sesame Credit, is currently in the closed beta testing phase, which should be one of the final steps before Ant can start selling the credit rating services to small and medium sized business, according to the reports, which cite unnamed inside sources. (English article)

Previous reports have indicated Ant is aiming to make an IPO next year, which means we could see one more fund-raising round before the offering. It’s possible we could see the company push to allow at least some investment by foreigners, especially as China tries to open up its financial services sector to more outside investment.

Such a move could also push up Ant’s valuation, since limiting fund-raising to big domestic buyers highly limits who can purchase Ant’s shares. But all of that said, 2017 is still quite far away in China’s quickly changing landscape, characterized by a rapidly slowing economy and highly volatile stock market. Accordingly, we could easily see the IPO delayed if Ant’s valuation peaks and stagnates with China’s slowing economy, and if the nation’s stock markets retain their current volatility.

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