Banks earn $ 650 million in fees and stock gains from wave of IPOs


Traders work during the IPO of Chinese ridesharing company Didi Global Inc on the New York Stock Exchange (NYSE) floor in New York, United States on June 30, 2021.

Brendan McDermid | Reuters

From Krispy Kreme to China’s Didi Chuxing, the busiest week for U.S. IPOs in 17 years has produced a boon for Wall Street’s major investment banks.

A cybersecurity company, drug developers and a Turkish e-commerce platform were all in the game. At least 14 companies have raised $ 100 million or more offers on the Nasdaq and the New York Stock Exchange, the most active stretch for debuts since 2004.

In total, the underwriters generated nearly $ 400 million in fees for assistance to IPOs. They’re sitting on additional paper earnings of $ 259 million at Friday’s close, assuming they exercise their options to buy all of their shares awarded at the IPO reset.

The pace of offers underscores the demand for growth and shows that IPOs remain the preferred route to the market despite the rise in direct listings, which have no underwriters and come with much lower advisory fees. It’s a very lucrative business for Wall Street, and there is no downturn in sight.

Robinhood filed its IPO prospectus on Thursday and is expected to be one of the biggest deals of the year. Rising demand for crypto assets led to a quadrupling of first-quarter revenue to $ 522 million, while the company’s loss increased to $ 1.4 billion in part due to a fundraising campaign. emergency related to GameStop’s commercial mania.

The stock trading app is likely to generate a higher valuation in the market, while simultaneously playing a larger role in the IPO boom by providing retail investors with a way to invest in deals that historically targeted large institutions. Robinhood reserves up to 35% of its IPO shares to its clients.

“I think this will be one of the biggest memes stocks of the future,” Thomas Peterffy, president of Interactive Brokers, told CNBC’s “Squawk Box” on Friday. “They have negative equity, they have about zero income, and they are growing fast. So that’s the kind of thing the market seems to like lately. I can’t wait for them to come into the market. community, bringing more and more people into the market. “

Goldman, Morgan, JPM the big winners

In last week’s IPOs, underwriting fees ranged from 2% of the total amount raised, in the case of massive funding for ride-sharing company Didi, to 7% for more modest deals such as corporate offers. CVRx Healthcare, Aerovate Therapeutics and Acumen Pharmaceuticals.

Goldman Sachs and Morgan Stanley, as usual, generated the highest commission income from acting as lead IPOs for Didi and cybersecurity software provider SentinelOne, the two biggest offerings in the week.

Morgan Stanley and JPMorgan Chase were the main underwriters in the IPO of Turkish online sales company D-Market Electronic Service & Trading, legal services site LegalZoom and Krispy Kreme, which were third, fourth and fifth respectively. the most important offers of the week.

Donuts are sold at a Krispy Kreme store on May 5, 2021 in Chicago, Illinois. The donut chain announced yesterday that it plans to take over the public company.

Scott Olson | Getty Images

In addition to the advisory fee, underwriters also make money on IPOs by getting the option to buy shares at the offer price so that they can benefit from the pop that usually follows. . Not all of the deals last week saw big initial rallies, but they all led to gains for banks that were able to receive an allocation.

Even with Didi’s mixed gains in his first three days of trading, the stock’s 11% rise means the underwriters are up $ 66 million if they exercise their options. The paper’s earnings on SentinelOne stand at $ 46 million after that stock jumped 27%. The Xometry manufacturing market has climbed 58% in three days, so far producing potential gains of $ 26 million, while airport security firm CLEAR has seen a $ 34 million increase after a jump in 53%.

For Morgan Stanley and JPMorgan, the IPO record comes a week after the two banks led the IPOs for healthcare technology company Doximity and cloud software provider Confluent.

These two offers paid a combined underwriting fee of $ 74.7 million, and the Doximity deal included a share allocation that generated $ 83 million in earnings based on the pop IPO. However, Confluent took the unusual decision not to issue to the underwriters the call option at the IPO price.

The company highlighted the potential importance of this decision in the risk factors section of its prospectus:

“Without this option, the underwriters may elect not to engage in certain transactions which stabilize, maintain or otherwise affect the market price of our Class A common shares, such as short sales, stabilization transactions and purchases to cover positions created by short sales, to the extent that they would have entered into such transactions if we had granted such an option to the underwriters, ”Confluent said.

Doximity CEO Jeff Tangney told CNBC’s Deirdre Bosa that while an IPO was the right choice for his company, he was happy to see the increase in direct listings and special purpose acquisition companies. (PSPC) as alternatives because competition lowers costs.

Doximity paid a fee of 5.5% of the offer size, which is roughly in line with this year’s average but below the maximum rate of 7%.

“It has improved the economy for us,” he said. “Banks charge less and do more, which is good.”

WATCH: Doximity CEO on Doctors Social Network goes public

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