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Ant Group and Emerging Market IPOs

 By Ichiro Suzuki Ant Group is on the cusp of a much anticipated and the biggest IPO in history. Raising an expected $35 billion (as of this writing on October 27), it is set to eclipse $25 billion brought to Saudi Aramco at the end of 2019. While Saudi Aramco sold a tiny fraction, 1.5%, of the company, to the public, Ant is making a much larger portion public. This IPO is expected to value Ant at $250 billion. Ant might have received a much greater valuation, were it not for the Sino -American Tech Cold War. In view of what has happened to TikTok in the U.S., it is highly likely that any ambition Ant many have in the U.S. could face a political force to crush it. Long before the Tech Cold War began to intensify, Ant was already denied a proposed $1.2 billion acquisition of MoneyGram, a money transfer company based in Dallas, Texas. At a time when Donald Trump was inaugurating, Ant won a bid on MoneyGram, beating a rival bid from Euronet, as a means to develop its cross-border payment network into the U.S. and major corridors including the Philippines and India. At the end of 2017, however, the bid was denied by the Committee for Foreign Investment in the United States (CIFIUS). After almost three years since then, it would be nearly impossible for Chinese firms to do anything in the U.S., and it would be difficult to be fully accepted in the developed, western world. Nonetheless, it still doesn’t change the fact that Ant is an amazing company. While the dazzling tech sector makes China intriguing for bankers to take new companies to public in the 2020s, the rest of the emerging markets is increasingly losing the luster it once had in IPOs, as well as investments in general. In the old days, the main drivers of emerging market IPOs were sales of government-owned assets. In every country, there is a telecom operator, a power company, railways, a postal system, a bank or two, and often fossil fuel drillers or mining companies. However boring these businesses may look on the surface, at a right time high growth rates in Asia or Latin America made those companies look appealing to investors in the developed world. The boom of selling government-owned assets was initially kindled in the developed world, with IPOs of Nippon Telephone and Telegram (NTT) and British Telecom (BT) both in 1987. The Japanese stock market was flying high on a brisk economy under low inflation and low interest rates, a boom that later proved to be a historic bubble. The mood was positive in the U.K., too, in the 1980s, as Prime Minister Thatcher was making Britain great again, terminating the British disease. It takes a positive macro story to sell these otherwise boring assets. While Asia’s high growth has been a well recognized story, Latin America in the 1990s boomed as the region exited an excruciating debt crisis that plagued the region’s economies throughout the 1980s. Under supply-side driven new economic programs in a variety of countries, there was a region-wide collapse in inflation that afflicted the economies, and interest rates came sharply down. Dramatically improved macro economic conditions brought flight capital back home and their currency strengthened. In response to strong growth in East Asia and the U.S. as the victor of the Cold War, commodity prices rose strongly giving an extra boost to Latin America. Great stories brought an IPO boom. Everything went well for a while. That was then. There was an even more frenzied boom in emerging markets in the first decade of the 21st century. Once dazzling growth rates are now slowing, especially outside of China. In many parts of the rest of the developing world, growth rates are not much higher than that in the U.S. At lower growth rates, there are few stories to sell. IPO markets are stalled, but for innovation-driven corporations which are found only in China. Once those great stories have faded, former government assets have lost their lusters. Those companies operating in a heavily regulated environment are looking as boring as they are supposed to be. If not under tight regulations, they can still be companies that drill fossil fuel, whose futures are seen with growing doubts in recent years, and especially in 2020. Worse, these companies that have lost their luster often account for a half of the market or higher. China is not an exception to this emerging market malaise though the tech sector and higher growth rate than others disguise the whole truth. As it turned out, Saudi Aramco IPO symbolically took place in the final month of the last decade. The 2020s are turning out to be much more unkind to fossil fuel drillers than in the past.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan


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