• Two dozen investment banks had been set to receive a fee worth 1 per cent of the offering in Hong Kong
• The deal had been set to shake up the league table for Hong Kong's equity capital market transactions

The suspension of Ant Group's debut is likely to cost a cadre of the world's largest investment banks nearly US$400 million in fees collectively, after Chinese regulators this week called a halt to what was expected to be the world's biggest initial public offering ever.

The dual listing in Hong Kong and Shanghai was expected to raise as much as US$39.67 billion, topping a US$29.4 billion listing by state-owned energy giant Saudi Aramco last year and a US$25 billion offering by Chinese e-commerce company Alibaba Group Holding in 2014. Ant is an affiliate of Alibaba, which also owns the South China Morning Post.

Ant delayed its offering 48 hours before its highly anticipated debut on Thursday following a meeting with China's top financial regulators, saying it led to a “significant change” in the company's business environment and might result in the fintech company not fulfilling its listing requirements or disclosure rules.

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The scuttled IPO came a day after regulators published draft rules to curb a rapidly growing online microfinance market in China, where Ant and other digital platforms use big data to help banks assess and provide loans to small businesses and individual borrowers.

A revived IPO could take months to happen. In the meantime, Ant moved this week to refund US$167.7 billion deposited by Hong Kong retail investors seeking a chance to buy shares of the owner of superapp Alipay.

“We think the goal of the IPO suspension is to leave more time for Ant to further disclose related impacts of the new regulations on its credit business and valuation,” Chelsey Tam, a senior equity analyst at Morningstar, said in a November 5 research note. “And the regulator needs time to clarify how those detailed rules will be implemented. It is uncertain how Ant is going to restructure its credit business at this stage, though we would expect a depressed valuation for Ant as additional registered capital is added.”

The Hong Kong leg of the IPO included two dozen investment banks, with Citigroup, JPMorgan Chase, Morgan Stanley and CICC serving as joint sponsors on the listing. The banks were set to share a piece of a 1 per cent underwriting commission on the transaction, with the sponsors taking the biggest chunk of those fees, according to Ant's prospectus.

Based on the maximum size of the offering, the underwriters would split a fee worth US$396.7 million - or the equivalent of about a fifth of Goldman Sachs' investment banking revenue in the third quarter.

By comparison, underwriting banks shared a fee equal to 1.2 per cent of Alibaba's then-record setting IPO six years ago, worth about US$300 million, and a fee worth 0.25 per cent of the Saudi Aramco transaction last year.

It is equivalent to the 1 per cent underwriting commission paid to banks on the US$5 billion IPO of Budweiser Brewing Company APAC in Hong Kong last year. The IPO of the regional arm of AB InBev was scrapped in July 2019, but was revived in a slimmed-down version a few months later, after it sold its Australian business to Japan's Asahi Group Holding.

Banks contacted by the Post declined, or did not respond to requests for comment.

As critical as fees are, the notoriety and bragging rights of leading the world's biggest deal might be just as important to bankers. The deal had been set to shake up the league table for Hong Kong's equity capital market (ECM) transactions.

Goldman Sachs, a bookrunner on the Ant IPO, was ranked No. 1 for ECM transactions in Hong Kong as of November 5, according to data from Refinitiv. HSBC stood at No. 2, but was not a bookrunner or sponsor on the deal. Morgan Stanley and CICC stood just behind HSBC at No. 3 and No. 4, respectively, and were likely to leapfrog HSBC after the transaction concluded, according to data from Refinitiv.

The suspension of Ant's IPO also follows the collapse last year of a New York offering by WeWork, the flexible workspace unicorn, and a series of accounting scandals involving Chinese companies listed in the US, including Luckin Coffee.

The delay was “incrementally negative”, but not necessarily a sign Ant's business model was “fundamentally broken”, according to Kevin Kwek, an analyst at AllianceBernstein. Ant was likely to have “sufficient time” to transition to any new rules.

“For investors that believe Ant can manage regulators well, this delay will cast some doubt on that,” Kwek said. “Regulatory risks are not insignificant, so weakening this assumption does not bode well for Ant. And taking more on the balance sheet means moving away from the ‘asset-light' model that goes well with tech valuations, and they resemble” banks a little bit more.

High-profile offerings can bolster the reputations of banks and boost the annual bonuses of rainmakers. Unforeseen risks, such as regulatory challenges or a ratcheting up of geopolitical tensions, can lead to reputational damage and wasted time for key bankers when IPOs fail.

“The worry now is that some sponsors in Hong Kong succumb to temptations to reduce solid due diligence standards, so as to cash in on the opportunities offered by new IPOs in a testing market environment - and that, in doing so, they expose themselves and their directors to harm, and outside investors to steep losses,” said Steve Vickers, chief executive of Steve Vickers and Associates, a political and corporate risk consultancy.