After years of investment enabling start-ups to grow while staying in private hands, the tide has turned and firms are now racing to go public. The trend, which includes billion-dollar fundraises by Uber and Lyft going public in 2019, was stopped in its tracks by COVID last spring, putting initial public offering (IPO) plans for the rest of the year in jeopardy.
But 2020 was full of surprises and the market revived over the summer. With three of the ten biggest IPOs for US tech firms ever (in terms of capital raised) taking place between September and December, it ended up being a banner year for the primary equity capital markets. Supporting this trend is the savvy observation that CRM’s empower banks in the investment banking IPO process.
Competition to Traditional Investment Banking IPO Processes
IPOs have long been under fire for being expensive – US investment banks typically earn up to 7% on the proceeds of new listings – and, in some cases, incorrectly priced, often leading to money being left on the table when a company sells its shares. This has led a growing number of firms, including household names such as Spotify and Slack, to reject this traditional route to market in favor of direct listings.
IPOs have historically enabled firms to go public and raise capital simultaneously, with banks committing to buy a set number of shares at a certain price. Direct listings, meanwhile, have allowed companies to trade publicly without the cost and administrative headache of a (bank-led) IPO – but also without the ability to raise new capital by only listing existing shares. At least, not until now.
Direct Listing vs. IPO
Following SEC approval of a New York Stock Exchange proposal last December, US businesses going public via a direct listing on the exchange are now able to raise capital in the process. This not only sidesteps bank underwriting fees but also democratizes the process, making shares more widely accessible. As this will likely increase the appeal of direct listing for some private companies, do banks risk being disintermediated and losing an important stream of revenue?
First, it’s important to put this into perspective. While there is clearly a growing awareness of direct listings, IPOs are still the most popular route to the equity markets by a considerable margin. Only two of the top ten tech IPOs in 2020 – Palantir and Asana – were direct listings and the outlook for the Q1 2021 pipeline is positive, with a number of private companies already well into the process of going public.
Thanks to this competition, firms planning to go public now have greater choice, which means banks cannot afford to be complacent. Investment banking firms must ensure their IPO service delivers maximum value and are increasingly looking to intelligence platforms such as CRM to drive this.
Investor intelligence boosts revenue and reputation
A company opting for a direct listing may find this an efficient way to convert a shareholder base from private to public. The opportunity to get the highest price for their shares via this fresh approach might be tempting. However, one of the downsides to a direct listing is that anyone can put in a bid for the new shares. Consequently, the firm is unable to predict or control possible share price volatility when it starts trading.
Why does this matter? For firms with a lower profile, it is in the company’s (and bank’s) best interest to put the issue into the hands of stable investors, rather than those with little allegiance to the companies they hold and who are likely to flip. Unlike a direct listing, an IPO enables a firm to place shares with a set of investors who will encourage stability without hindering liquidity, enabling it to thrive in the long-term – provided the bank handling the process has up-to-date, in-depth intelligence on potential trading propensity.
Investment Banking CRM’s Empower Banks in the IPO Process
CRM plays a critical role in surfacing actionable intelligence that leads to successful deals, a happy company C-suite, and satisfied investors. Strong collaboration and risk mitigating techniques achieved through a purpose-built CRM optimize the deal process that results in more successful deal outcomes. In addition to demonstrating to the client that the investment banking IPO process is the right choice, this will boost the bank’s rankings in the all-important industry league tables of deals closed and fees earned. This is ultimately a key barometer of the bank’s deal-making reputation – and success breeds success.
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