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China tightens online lending rules in fresh blow to Jack Ma’s Ant Group

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China’s banking regulator has tightened rules governing how online lending platforms fund their loans, a move that analysts say could hit the valuation of Jack Ma’s Ant Group.

Under the rule changes announced over the weekend by the China Banking and Insurance Regulatory Commission, online lending platforms will have to contribute 30 per cent of the funding for loans they offer in partnership with banks.

The CBIRC will also cap how much capital commercial banks can commit to online lending in co-operation with tech platforms. The new rules will come into force next year.

The draft of the new regulations released late last year caused Chinese tech stocks to tumble, and was one of the catalysts for the abrupt cancellation of the proposed $37bn listing of Alibaba’s online payments and lending arm, Ant Group, in Hong Kong and Shanghai.

Ant, which uses algorithms to determine the loans individuals are eligible for, is set to come under even more valuation pressure due to the new rules, experts said.

Wong Kok Hoi, the founder of APS Asset Management, said the rules were likely to force the current scale of fintech loans to “contract significantly” in China and the changes could force the companies to operate more like commercial banks. “Ant’s business model will need to be drastically revamped,” he said.

“This will raise financing costs for consumers and will cripple one of the fastest-growing business segments for Ant, almost certainly forcing a steep drop in its eventual valuation,” said Michael Pettis, finance professor at Peking University.

Bruce Pang, head of macro and strategy research at China Renaissance Securities, said the new rules meant banks would be required to cap the joint lending business they carry out with these fintech companies. Some of the fintechs would also need to seek new licenses.

“Online lending platforms could face more valuation pressure with dampened growth prospects, considering that they would have to raise more capital to fund [themselves] in joint loans with banks,” Pang said.

Before these new regulations on capital contributions, Ant had been funding only 2 per cent of its hundred of billions of dollars in consumer loans with most of the remainder coming from partner banks.

Ant’s listing would have been the world’s largest and was suspended just days before it was due to start trading.

The company’s Alipay app, which is used for payments, loans, and insurance, has more than 700m monthly users.

The cancellation was also seen as political, and came after Ma, Ant’s founder, had publicly criticised Chinese regulators.

Since then, the company has reached a deal with Chinese regulators to restructure its business, which would involve Ant placing all of its major businesses, including its technology units, inside a financial holding company.

The squeeze on Ant has pushed Chinese borrowers towards alternative lending platforms, many of which charge higher interest rates because they lack Ant’s economies of scale and have less sophisticated systems to identify and manage risk.

Regulators have in recent months taken a harsher stance against the nation’s burgeoning private fintech companies in official statements.

Ant Group declined to comment.



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Dual-class shares: duelling purposes | Financial Times

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The ship looks set to sail on Britain’s aversion to dual-class shares. A government commissioned review, released on Friday, backs the structure, which is popular with tech founders keen to retain control after taking public money.

Lex, among others, has opposed weighted voting rights as poor governance. Advocates point to the bigger picture: spurn dual-class shares and lose out on big initial public offerings. London would not be the first to cave. A similar argument saw Hong Kong capitulate after Alibaba took its record $25bn IPO to New York in 2014. Singapore swiftly followed suit; even Shanghai now hosts companies with dual-class shares on its tech-oriented board.

Ron Kalifa, author of the UK report, lays out the numbers: the US nabbed 39 per cent of the 3,787 IPOs on major exchanges between 2015 and 2020, while the UK took under 5 per cent. US companies with dual-class shares have outperformed peers, but this is as much to do with tech credentials as, say, Mark Zuckerberg’s stranglehold on Facebook votes. Proponents also applaud the poison pill conferred by weighted voting rights. This, they say, would have seen off pesky foreign buyers of British assets such as Arm and Worldpay, coincidentally Kalifa’s own old shop.

If dual-class shares are inevitable, curbs should be too. Sunset clauses, converting founders’ shares to ordinary class over time, are one obvious step already in use. At Slack, for example, shares convert over 10 years to common stock. Another is to exclude certain votes; on executive pay, say, or related party transactions.

One big caveat: dual-class shares will not open the floodgates to new listings. Ask Hong Kong, a market four times as liquid as London. Post-relaxation of the rules, China tech listings continued to flock to the US because valuations are higher. Last year, despite ground-zero Sino-US relations and tightened accountancy rules, Chinese tech companies flocked to the US. The current run of “homecomings” — US-listed companies such as Alibaba securing secondary listings in Hong Kong — is politically driven. More effective, certainly, but not an option for the UK.

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A Lucid sign of the tech bubble

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This week, tech stocks dipped and a generation of entrepreneurs was offered a glimpse of its own mortality.

At the very least, it has been a reminder that a reset is long overdue after a year-long surge in tech stocks — and that capital will not always be as readily, and cheaply, available.

When cash is plentiful, the close alignment between Wall Street and Silicon Valley can feel almost unbreakable. Tech start-ups promising to change the world supply the big vision for investors eager to find a reason to believe. Conditions like this favour so-called story stocks — ventures that can spin a simple narrative about a huge new market opportunity.

A classic of the genre is the electrification of personal transport. This week’s additions to the dream of a world beyond combustion engines include the $4.6bn flowing into luxury electric car maker Lucid Motors and the $1.6bn raised by would-be air taxi service Joby Aviation.

Despite the obvious risks when a wave of capital washes into tech start-ups, there are some benefits. It can, for instance, help to drag new technologies into the mainstream: the tech and telecoms bubble at the turn of the century may have led to huge financial waste, but it funded the communications networks and digital infrastructure to support the next generation of internet companies.

It also means promising technologies are no longer at risk of being underfunded — though simply pouring in cash won’t bring them to commercial viability any quicker. It has taken many years for battery technology to ride the cost curve. The fact that billions of dollars are suddenly available cannot speed that process. Yet Wall Street’s financial vehicle du jour for channelling money into tech start-ups — so-called special purpose acquisition companies that raise cash and then seek a promising company to merge with — come with two very big warning signs.

The first is that, in this new form of stock market-financed venture capital, windfall profits can flow to promoters and speculators long before the new businesses prove their commercial viability. Traditional venture capitalists usually don’t see profits, or get the chance to sell, for years.

The different incentives embedded in Wall Street’s version of VC is exemplified by the Lucid deal. On paper, the Spac involved has already made an 87 per cent profit from its investment, just for doing a deal. And its promoters, who paid a grand total of $25,000 for their “founder shares”, are sitting on a stake the market values at $1.5bn.

The Spac has also provided a vehicle for wild speculation. Its publicly traded shares had already shot up more than fivefold in anticipation of a deal, before falling back by nearly half.

There are some mechanisms to encourage a longer term view, such as placing limits on how soon a Spac’s promoters or follow-on investors can cash out. But the 18 months lock-up on the Lucid Spac’s founders is nothing compared with the many years traditional VCs often have to wait to see a return.

The second concern is that the current close alignment between investors and entrepreneurs is highly unlikely to last. Financial conditions will change. Even with perfect execution over many years of the promises made by start-ups, it will be hard for the new companies to support their current valuations.

Unlike companies that arrive on Wall Street through a traditional initial public offering, Spacs make revenue promises upfront. Joby says it will not have any sales at all until 2024, but then reach $2bn in revenue five years from now. Lucid, which has not launched its first vehicle, is predicting that annual revenue will rise above $20bn within five years — a figure that Tesla only topped in 2019.

These promises are supporting heady valuations. Lucid is judged, on paper, to be worth $24bn. Tesla only reached that after it had been making and selling cars for five years, and a year after its groundbreaking Model S had hit the road.

It may be the case that the world is on the way to more electrification, with luxury cars like those made by Lucid, and air taxis like those operated by Joby, an important part of a clean energy future. But when times change on Wall Street, many investors may no longer have the patience to go along for the ride.

richard.waters@ft.com



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Soho House plans to list in New York with $3bn valuation

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Soho House, the private members’ club group, is making plans to list in New York as early as next month in order to capitalise on investor appetite for travel and leisure stocks as the pandemic subsides.

The company intends to join the stock exchange with a valuation of as much as $3bn, despite the closure due to coronavirus restrictions of 11 of its 27 clubs across Europe, Asia and the US, say people familiar with matter.

Speculation that the target price will rise from a $2bn valuation set in a $100m funding round, led by its majority shareholder the US billionaire Ron Burkle in June last year, is based on anticipation of a boom in demand for travel stocks.

The hospitality group, which also owns 20 restaurants, 16 spas and two cinemas, declined to comment on the plans, first reported in The Times.

Shares in the hotel company Marriott are up 26 per cent since February, while Airbnb’s share price has increased more than 40 per cent since it listed in December.

Despite steep drops in revenues as a result of sites being closed, Soho House has managed to retain more than 90 per cent of its paying members during the pandemic. A typical annual membership costs £1,750.

However, Soho House’s recently filed accounts show the company stopped making interest payments on its loan in cash last year, instead choosing to use a “payment in kind” option. This allows companies with limited cash flow to pay lenders with more debt instead.

Permira Debt Managers, the credit arm of the private equity house, originally provided this £350m loan to the private members’ club in 2017, describing the debt deal as its “largest ever direct lending investment” at the time.

The private debt deal came two years after Soho House had to scrap a £200m high-yield bond sale, as investors balked at the company’s high leverage and limited free cash flow.

It is the second time Soho House has mooted a stock market flotation.

It pulled a planned New York listing in 2018, saying it did not need to raise capital as it had Permira’s backing and its owners — who include Burkle, the hospitality entrepreneur Richard Caring and Soho House founder Nick Jones — did not want to sell out.

Jones, who opened his first Soho House in 1995, told the Financial Times last year that the group did not need to consider a listing as “there is a nice lot of demand from people to invest in the company as it is”.

Over the past 26 years, Soho House has grown rapidly, becoming a hotspot for celebrity guests by targeting wealthy urbanites in the creative industries.

According to its 2019 accounts, it made £293m in revenues, 49 per cent of which came from food and drink sales and 20 per cent from members’ subscriptions with the remainder coming from its own-brand range of homewares. It reported a pre-tax loss of £77m.

During the pandemic, the group was forced to lay off 1,000 of its 8,000 employees.



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