Why Wall Street Banks May Miss Out on Leading Ant’s Shanghai Share Sale

(Bloomberg) — Most Wall Street banks are going to miss out on a chance to lead what could be China’s biggest stock deal when Ant Group goes public in Shanghai.

Under a rule for initial public offerings (IPOs) on China’s technology exchange, lead banks must buy at least 2% of the shares issued, up to a cap of 1 billion yuan ($143 million). Global institutions such as Morgan Stanley and UBS Group AG, with limited capital on China’s mainland, are reluctant to commit that much money to one deal.

That means most international lenders won’t seek top billing for the Shanghai portion of the IPO by the Alibaba spinoff that could raise more than $10 billion. With fees as high as 7% on the tech-focused STAR Market, Wall Street banks could be losing out on a revenue pool worth hundreds of millions of dollars. Lead or sponsor banks set pricing and manage IPOs, typically getting the lion’s share of the underwriting fees.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS will probably avoid a lead role on the Shanghai deal, according to people familiar with the banks who declined to be identified discussing private matters. No final decisions have been made as lenders are more focused on the Hong Kong portion of the IPO for now, the people said. The banks may seek junior roles in Shanghai.

Representatives for the banks and for Ant Group declined to comment.

Passing on a chance for lucrative IPO fees is a tough pill to swallow for global banks that are investing billions to win a bigger slice of China’s $45 trillion financial market. China opened the door wider this year for banks and money managers to sell more products and set up wholly owned brokerages to tap growing demand in the world’s second-biggest economy.

“This is the deal not any major bank will want to miss out on, but due to limited capital and local network, it is not easy for Wall Street firms to compete with local firms,” said Mark Huang, a Hong Kong-based analyst at Bright Smart Securities.

Jack Ma’s Ant Group could surpass Saudi Aramco’s record $29 billion IPO if market conditions are favorable, according to a person close to the deal. The dual listing in Hong Kong and Shanghai by China’s biggest mobile payments company is targeting a valuation of more than $200 billion, exceeding that of most Wall Street firms, the people said.

Many global banks are still in the process of setting up their own businesses or buying out local partners in China and aren’t in a position to manage a massive IPO like Ant Group’s, especially when they have to put up their own capital. Morgan Stanley and Goldman Sachs won approval this year to take control of their Chinese joint ventures, while Citigroup Inc. is going it alone after exiting its partnership last year.

Several foreign banks are getting a piece of Ant Group’s Hong Kong sale, led by China International Capital Corp., Citigroup, JPMorgan and Morgan Stanley, according to people familiar with the matter. More banks may be added later as banks including Goldman Sachs and Credit Suisse Group AG pitch for smaller roles, according to the people.

China firms

Without the global banks, Ant Group will probably have to rely on Chinese brokers to lead the Shanghai sale. The STAR board, launched last year, imposes rules for bank sponsors leading IPOs to buy 2% to 5% of the shares and hold them for two years. The aim is to ensure that banks underwriting the sales have skin in the game and price the stock appropriately.

“The mandatory co-investment rules place both capital constraints and financial pressure on sponsors, which serves as an incentive for sponsors to step up their monitoring of IPO quality,” said Beijing lawyer Shiwei Zhang, in a research note on Global Legal Insights.

This type of investment in IPOs is rare in global markets. Banks are wary of putting money into their own deals, which creates potential conflicts of interest and erodes their independence as financial services providers, people familiar with the banks said. Companies managing the planned IPO for fintech giant Lufax in New York also face a conflict over the Ant Group sale because the two are competitors in China.

The STAR Market has so far listed 140 companies with a combined market value of 2.79 trillion yuan. UBS is the only foreign bank that has led a deal on the new venue, a small 1.5 billion yuan sale for Shanghai Biological Technology Co.

Morgan Stanley’s joint venture in China helped run Semiconductor Manufacturing International Corp.’s $6.6 billion IPO this month, the largest on the STAR market. The U.S. bank didn’t have to buy shares in that deal because it wasn’t a sponsor.

The STAR 50 index has returned almost 50% this year, more than double the gain for the Nasdaq Composite Index in the U.S.