In a move that surprised many, Alibaba-backed Chinese fintech Ant Financial had its dual Shanghai / Hong Kong IPO blocked earlier this month by China’s regulator just days before it was due to list. Investors were expecting it to be the largest IPO ever, with a target capital raise of $37 billion. It now looks like the deal won’t happen until mid-2021 at the earliest.
From a purely market perspective, the failed IPO is only a China problem.
Fintech companies from Russia to Brazil have done well this year, with some seeing record breaking IPOs, impressive capital raises, and transformative M&A.
Fintech is proving to be a darling sector for investors, with valuations on the rise and big traditional corporations on the hunt to buy instead of build. In a recent interview with WSJ Venture Capital, Better Tomorrow Ventures co-founder Sheel Mohnot suggested that “most companies in the future will have a fintech component to them.”
Kazakhstan’s fintech company Kaspi.kz brought in more than $1 billion from its IPO on the London Stock Exchange last month, making it one of the top two foreign listings in London. Kaspi is a financial services and e-commerce platform.
“The fintech space in Russia and Kazakhstan is very different from that in [other] markets,” says Andrey Mikhailov, senior analyst at Sova Capital.
Emerging markets are often home to an “unbanked” population, where people are more likely to have a mobile phone than a bank account. This has spurred intense innovation in fintech and payments space in developing countries.
Sovcombank, the “Klarna of Russia”, is rumored to be contemplating an IPO now. Klarna is a “buy now, pay later” program. Sovcombank’s national payment plan platform, Halva, got a shot in the arm after the bank acquired Qiwi’s Sovest consumer lending business. Qiwi’s share price fell after that, so some emerging market investors are thinking a Sovcombank IPO benefits from that acquired business.
“Halva’s uptake is a testament to the demand from emerging markets and those markets can enable their consumer base to leapfrog technologies – for instance, Russia adopted contactless payments more rapidly than some developed markets because a paper checking system was never widely adopted, like it was in other countries,” says Sergey Khotimskiy, the first deputy chairman of Sovcombank.
Russia’s most successful fintech player, Tinkoff, has always been an online-only financial player without brick-and-mortar bank offices. It has been public for a while now in London. Its stock is up 30% year-to-date ending November 10, while the VanEck Russia ETF is down 10%.
“Tinkoff had been an online credit card monoliner, while Kaspi had been a classical offline consumer finance bank, both active for more than a decade,” says Mikhailov.
In September, Tinkoff reached an agreement in principle for tech giant Yandex to take over the neobank in a $5.5 billion cash-and-shares deal. A “neobank” is a mostly online banking concern with no physical branch networks. Negotiations broke down, but Tinkoff has seen aggressive growth over the past few years and posted around $500 million in profits in 2019.
Brazil’s most prominent financial startup, Nubank, raised $300 million in equity investments recently, much of it from Goldman Sachs, according to a filing with the U.S. Securities and Exchange Commission.
The presumed election victory of Joe Biden is seen as a nice little tailwind for emerging markets, in general.
A 55% rally from the lows in the last 33 weeks is in line with the 52% average of the four previous rebounds in emerging market equity, led by the tech sector. Emerging markets have already regained their previous highs. This took 6.5 years post-1997, 3.5 years post-2000 and 1.5-years post-2016.
“This is a very rapid turnaround and an impressive rebound,” says Daniel Salter, head of research and equity strategy for Renaissance Capital.
Third-quarter reports show equities nearly back to their pre-pandemic peak, with debt performance varied depending on credit rating. China is one of the best-performing equity markets in the world right now.
Fintechs and what the Russians refer to as “neobanks” are thriving. The growth potential for new players in this space gives investors a lot of new companies to watch for.
Ant Group was going to be another one. It would have been a blockbuster.
“Ant Group was poised to shatter the record as the largest initial public offering in history,” says Brendan Ahern, CIO of KraneShares in New York. The future timing of its IPO in Hong Kong is now uncertain as the company is forced to address how it facilitates consumer loans.
“There is no question that growing banking system involvement by China’s gigantic, rapidly evolving techpreneurs has attracted increasing regulatory scrutiny,” noted Whiteney Jiranek, Global Emerging Markets Equities Analyst at BNP Paribas, in a report on emerging markets fintech and financial inclusion. “And for good reason: pockets of involvement such as peer-to-peer (P2P) lending have revealed harmful or negative practices for both borrowers and lenders.”
Ant Financial’s stalled IPO came just ahead of its parent group Alibaba’s Singles Day Global Shopping Festival, which once again smashed previous sales records, even as China is still coping with a health crisis.
All this goes to show that even Covid cannot stop fintech. If anything, the pandemic may accelerate adoption of fintech services.