Wall Street’s IPO Cost Machine Is Threatened After China’s Containment

China’s regulatory crackdown threatens to increase insurance costs for US investment banks such as Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley.

China-based companies were the most prolific foreign issuers of stocks in New York during the pandemic. But the burgeoning flow of $50 billion in U.S. IPOs and secondary stock sales is being jeopardized by new regulatory research surrounding cybersecurity firms.


Sign up for full access to all of our sharing and unit trust data tools, our award-winning articles, while supporting quality journalism.

“China’s increased surveillance of foreign listings by Chinese companies, announced by the State Council on July 6, could end unicorn listings in 2H in Hong Kong and the US,” Bloomberg Intelligence analyst Sharnie Wong wrote in a note. “Their combined share of Chinese IPOs could fall to less than 40% of the deal value in 2H from 55% in 1H, assuming the deal value halves sequentially.”

Investment banks raised $49.2 billion in U.S. equity offerings last year for companies based in China and their largest holders, up 452% from the previous 12 months. That includes more than $23 billion in IPOs and another $26 billion through secondary offerings.

The heavier deal flow has resulted in an increase in the fees to the banks. For example, the IPO of Didi Global Inc. of $4.4 billion alone generated $89 million in fees for a syndicate that includes Goldman, Morgan Stanley and JPMorgan Chase & Co. included and other US insurers.

Some banks are more vulnerable than others. According to Bloomberg data, Goldman led all banks with a 17% share of this market last year, with BofA and Morgan Stanley also in the top three. This is, of course, a drop in the ocean: Goldman earned about $311 million in fees from these deals, compared to $55.6 billion in net income for the 12 months to June 30.

Goldman Sachs declined to comment. Representatives from Bank of America and Morgan Stanley did not immediately return a request for comment.

Still attractive

While last year’s momentum could be jeopardized, a strong pipeline of Chinese companies should continue to drive US listing plans. So says Pruksa Iamthongthong, senior investment director Asian equities at Aberdeen Standard Investments.

“For a mainland company, the most important considerations would be whether the US remains an attractive IPO destination given the depth and breadth of the market, and whether a listing closer to home in Hong Kong might be a better alternative,” he said. they.

The Hong Kong market could pose less of a geopolitical risk than New York for companies looking to list outside mainland China, Iamthongthong added.

Since Didi debuted on June 30, no Chinese company has successfully priced a US IPO with revenue exceeding $22 million. Eight of the last ten cross-border listings out of China are trading below their IPO price, a sign of how hard IPOs have been hit by increasing regulatory pressure.

The latest deal that appears to have been stung by the crackdown and resulting sell-off is Hello Inc. The Shanghai software maker withdrew its US listing on Tuesday, the day it was expected to debut. But some of these deals can still be done. And if they move to Hong Kong, Western banks will still benefit – albeit at a lower cost.

After companies go public, especially from the technology sector that has been the focus of China’s crackdown, they are often seen as candidates for secondary offers. This has traditionally promised more reimbursements to US insurers.

The largest China-US secondary offering of the past year, a $4.2 billion offering in Pinduoduo Inc., raised $47 million in fees paid almost in full to Goldman and BofA, according to data collected by Bloomberg.

Equity capital markets are just the beginning. Regulatory action has also brought the use of debt to finance foreign mergers and acquisitions to a seven-year low as the White House pushes Wall Street to rethink its presence in China and Hong Kong more broadly.

© 2021 Bloomberg

Leave a Comment