Recent news came out that Alibaba (NYSE: BABA) just closed a $10 billion financing round for Ant Financial Services Group, operator of China’s biggest online payment platform by market share, Alipay. The deal valued the company at $150 billion and this is an excellent example to show how the little investor gets screwed.
According to Reuters, investors are Singapore’s sovereign wealth fund GIC Pte Ltd, and state investor Temasek Holdings (Private), as well as U.S. private equity firm Warburg Pincus LLC. So, mostly private and well-positioned firms invest before the IPO. But let’s take a look at what has been going on.
Yahoo, Alibaba & Ant Financial
If you have a pension fund, it probably owned shares of Yahoo which consequently owned part Alibaba.
You might think that, as Alibaba founded Ant Financial, you would also indirectly own 100% of it, but that is not the case. In 2012, Jack Ma spun Ant Financial out of Alibaba to himself, and Yahoo managed to make a deal where Alibaba had a right to 37.5% of profits which could be exchanged for a 33% stake.
So, here is the first part of Jack Ma himself screwing the Average Joe.
The Ant Financial IPO
The last financing round showed how a company raises $10 billion in cash at an absurd valuation in its final valuation round and only afterwards will it be offered to other investors. This means that when you buy through a fund or an index fund, you are really the last investor in the chain. Most of the companies that invested in the last financing round will probably sell to eager pension fund managers after the IPO, get a nice return, and leave the long-term risk to little investors hoping to retire.
If Ant Financial IPOs at $300 billion, that would be a 100% return for the investors investing in the last financing round, and a 500% return for those who invested in the previous round in 2016 that valued the company at $60 billion. As Ant Financial’s pre tax profit was $1.8 billion for 2017, the current pre-tax valuation is already 83 while the future IPO valuation might be double this current round.
That is how the financial world works. Make sure you aren’t always the last in line getting the crumbs. It will change your financial life.
But don’t also chase crazy risks that you don’t understand. The key lies in knowledge. The more you know, the better your risk adjusted returns will be. When you have knowledge, you will be able to understand things like the following.
Aberdeen asset management issued an article discussing how things are actually good in the global economy and how stocks and bonds might continue to appreciate even though valuations are stretched.
Now, the more you know, the more you will understand that investment returns depend on valuations and not on how the economy has done over the last few quarters. The fact is that it’s easy to reassure clients to keep their money in stock funds where the highest fees are, and it’s also easy to attract new, greedy clients by saying that things are good.
The message of the day is that you should think for yourself, but it’s also a rant against pension fund schemes that don’t think.
I feel sorry for all those who are tricked by Wall Street or make believe by governments that their pension funds are doing a great job for them buy buying the best stocks out there. Well, they might be buying the best, but they are definitely doing it at the best price possible… for the seller.