Midst tumbling valuations and frosty political climate, large investment banks are backing out of Chinese IPOs on Wall Street, and are forced to slash the size of their deals.
In the last few months, big banks including Bank of America, Credit Suisse, and Citigroup have walked away from Chinese companies’ efforts to sell shares in New York. According to sources close to the deals, and company filings, at least four Chinese companies have lost the support of sponsoring banks due to their valuations. These include Ucommune, China’s WeWork, and Canaan, which makes bitcoin mining technology.
The development comes in the wake of the United States ratcheting up scrutiny on Chinese companies trying to tap its capital markets midst trade tensions. In the autum of 2019, the Trump Administration even considered curbing the ability of US government pension funds to buy Chinese stocks; the measure did not materialize following the phase 1 U.S.-China trade agreement.
Given this backdrop, it is “no surprise banks are a little worried” on the pricing of initial public offerings (IPOs), said Stephen Chan, a partner at law firm Dechert.
He went on to add, “Bulge bracket banks don’t want to be involved if the company is just going to tank,” in reference to large investment banks.
Case in point: Credit Suisse invested six months working on a proposed Chinese drone maker EHang Holdings’ New York IPO only to step away a few weeks before the deal got priced in December. EHang raised only $40m in its December IPO, after initially seeking around $100m.
WeWork Chinese equivalent, Ucommune tapped Citigroup, Bank of America and Credit Suisse ahead of a proposed New York IPO. All three walked away from the deal in December. A banker described the valuation demanded by loss-making Ucommune as “crazy”.
Ucommune is set to be listed in early 2020.
Credit Suisse also walked away from underwriting Chinese audio streaming company Lizhi’s IPO.
According to data from Prime Number Capital, in total, 10 Chinese startups have pared their fundraising goals since September 2019 in order to get a US listing over the line.
In 2014, funds raised by Chinese startups in New York touched $29bn, whereas in 2019, it was a meagre $3.6bn, according to Dealogic. The listing of Chinese companies dropped by 25% from 2018. Declining valuations on those deals have also reduced investment banking fees. In 2019, the fee pool for the US listings of Chinese companies came to $194m, a 50% drop in comparison to the previous year and under 7% of Wall Street’s total IPO fees, according to data from Dealogic.
“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 a banker at a boutique advisory firm while adding that a bank’s typical commission was about 7% of an IPO’s proceeds.
According to analysts, the decision of whether the bank will underwrite the IPO sometimes comes down to whether the bank wants to maintain a longterm relationship with the company; this is even if the IPO fees are lower than it expected. If the bank sees underwriting the IPO as a first step in a longer relationship, banks would sometimes go ahead with such listings, since it could 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.
Bankers say, the lack of a big-name sponsor can make it harder to launch a successful IPO. As a result, smaller advisors have stepped in to fill the space left behind by their larger counterpart. Chinese companies “need the capital,” opined 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’.”