How Wall Street Lost Sight of Didi's Risks

(Bloomberg Opinion) -- Investors who recently bought into multi-billion-dollar Chinese tech listings in the U.S. may have thought they'd be enjoying the riches of some of the most hotly anticipated IPOs of the year. Instead, they're staring at headlines churn about Beijing-led regulatory probes and watching their gains vanish. It's a glaring example that the types of risks once relegated to boilerplate language, deep within company prospectuses, are now front and center. But who bears ultimate responsibility for rooting them out?

Wall Street banks including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. have become savvier underwriters since the latest version of China's cybersecurity law took effect last year. For Didi Global Inc., which launched a $4.4 billion initial public offering last week, and recently floated Full Truck Alliance Inc., hailed as China's Uber for trucks, language about the risks of doing business in China appear as early as page 7 in the IPO prospectus. On page 11, Didi warns: “Claims and/or regulatory actions against us related to anti-monopoly and/or other aspects of our business may result in our being subject to fines, constraints on or modification of our business practice, damage to our reputation, and material adverse impact on our financial condition, results of operations and prospects.” (In years past, those types of warnings didn't show up until somewhere between page 40 and 60.)  

Yet that didn't adequately prepare investors for what has unfolded. Within days of Didi's public listing, China's cyberspace regulator announced a probe into the company's collection and usage of personal data, and barred new users from its app. Officials then ordered the Didi Chuxing app be removed from mainland app stores. The crackdown widened to include Full Truck Alliance, as well as an online recruiting app owned by Kanzhun Ltd. 

Wall Street banks — top bookrunners on many of these listings, including Didi's, along with other brokerage firms — have just closed out on one of the busiest weeks for public offerings in the U.S. in 17 years. The average fees of 5% to 7% on U.S. IPOs are their bread and butter. They've generated nearly $460 million in fees in the first half of the year. Until April, Chinese firms were listing in the U.S. at a record pace, tapping the deep pool of capital and investor base there.

Against the backdrop of all these successes, it might be time to ask whether banks are fulfilling their duty to investors. The risks laid out in offering documents may not be getting the attention they deserve.

In theory, banks are middlemen between companies and investors. But that shouldn't mean they're bystanders. Some have unwritten rules about the types of companies they will back (for example, requiring boards to have at least one female director, or setting standards around the quality of the companies they bring to market). For an IPO the size of Didi's and considering a risk as large as regulation in China, investors expect — and pay for — a certain depth of expertise and access to on-the-ground insight about the regulatory landscape. 

This is a contrast to China, where regulators have been criticized for stringent listing rules. In fact, Beijing has been tightening guidelines, putting the onus on banks when they prepare a firm for a public offering. Underwriters have to ensure companies are legitimate, that they are brought market at a fair price and, as sponsors, the banks or brokerages involved have skin in the game. On Tuesday, China said it will increase supervision of companies on overseas exchanges and revise rules for listings abroad.

There are sure to be some uncomfortable conversations being had right now. Investors, no doubt, should be asking more questions and doing their homework. But perhaps underwriters, too, should be thinking about moving those warnings up to the first page.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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