Big investment banks cool on Chinese IPOs on Wall Street
Falling valuations and trade war to blame as lenders back out of companies’ listings Alibaba raised more than $20bn when it listed on the New York Stock Exchange in 2014
Big investment banks are backing out of Chinese IPOs on Wall Street, as tumbling valuations and a frosty political climate force companies to slash the size of their deals. Credit Suisse, Citigroup and Bank of America are among those that have walked away from Chinese companies’ efforts to sell shares in New York in the past few months. At least four Chinese companies have lost the support of sponsoring banks as their valuations have faltered and potential fees have fallen, according to people close to the deals and company filings. They include Ucommune, which has been described as China’s answer to WeWork, and Canaan, which makes bitcoin mining technology. The trend comes as the US has ratcheted up scrutiny of Chinese companies’ access to its capital markets, amid enduring trade tensions between Washington and Beijing. Last autumn the Trump administration considered a ban on Chinese listings and curbing the ability of US government pension funds to buy Chinese stocks — steps it ultimately backed away from, before signing a “phase one” agreement with China this month. Given this backdrop, it is “no surprise banks are a little worried” on the pricing of initial public offerings, said Stephen Chan, a partner at law firm Dechert. “Bulge bracket banks don’t want to be involved if the company is just going to tank,” he added, referring to the largest investment banks.
In one example, Credit Suisse spent six months working on the proposed New York IPO of Chinese drone maker EHang Holdings, only to step away a few weeks before the deal priced in December. EHang raised just $40m when it floated in December, after initially seeking about $100m. In another, co-working company Ucommune tapped Citigroup, Credit Suisse and Bank of America ahead of a proposed New York IPO. In October, all three banks were still engaged, but by December, they had dropped off the deal. One banker described the valuation demanded by lossmaking Ucommune as “crazy”. Ucommune is set to list early this year. “Chinese companies need the capital, they can’t wait around for a US bank” Benjamin Quinlan, Quinlan & Associates Credit Suisse pulled out of the IPO of Canaan in the run-up to the company’s New York listing in November. The company raised about $90m on its debut, having earlier aimed for more than four times that sum. Lizhi, a Chinese audio streaming company, also lost Credit Suisse as its IPO sponsor prior to its $45m listing in New York this month after lowering its fundraising target. In total, 10 Chinese start-ups have pared their fundraising goals since September in order to get a US listing over the line, according to data from boutique advisory Prime Number Capital. Wall Street has become a less obliging venue for Chinese companies seeking to tap America’s deeper pools of institutional capital and investment banking prowess. IPOs of Chinese start-ups in New York hit $29bn in 2014, boosted by Alibaba’s listing in the city, but total cash raised last year was just $3.6bn, according to Dealogic.
The number of Chinese companies listing dropped 25 per cent from 2018. Declining valuations on those deals have pressed investment banking fees. The fee pool for the US listings of Chinese companies in 2019 came to $194m, half 2018’s total and just under 7 per cent of total Wall Street IPO fees, according to Dealogic data. One New York-based banker said that if an IPO target fell below $100m, generally only one large bank, if any, would stay on the listing. “It becomes difficult to keep the big underwriter because if you look at the economics of the deal it doesn’t make any sense,” said the banker at a boutique advisory firm, adding that a bank’s typical commission was about 7 per cent of an IPO’s proceeds. Canaan and Lizhi’s offerings were eventually led by Citi, and EHang’s by Morgan Stanley. Analysts said that the decision to stay on a deal sometimes came down to whether the bank saw it as a first step in a longer relationship, even if IPO fees were underwhelming. People familiar with the banks’ thinking said the lenders would sometimes go ahead with such listings if they thought it would lead to a long-term stream of revenues. Credit Suisse declined to comment on its role in the Chinese IPOs. Citigroup, Bank of America and Morgan Stanley also declined to comment. Smaller advisers have stepped in to fill the place of international banks that have bowed out of such deals. Tiger Brokers, an online broker that allows Chinese investors to trade international stocks, helped bring EHang to the New York market last month. However, the lack of a big-name sponsor can make it harder to launch a successful IPO, bankers say. But Chinese companies “need the capital,” said Benjamin Quinlan, chief executive of Hong Kong-based financial services consultant Quinlan & Associates. “They can’t wait around for a US bank to say ‘yay’ or ‘nay’.” Additional reporting by Hudson Lockett