What’s the future of investment banking in IPOs?
Investment banks are facing plummeting IPO profits and finding their new place amid stronger regulatory constraints and innovation.
Investment banking has transformed significantly over the last two decades. What was once a lucrative industry and largely unregulated means of wealth creation now faces a much more uncertain future.
“Investment banking is seeing its historical profit centers eroded by technology and regulations. Core processes are being automated or commoditized. From IPOs, to M&A, to research and trading, investment banks are getting smaller, leaner, and scrambling to keep up with innovations.” (CBInsights)
So what does the future look like for investment banking when it comes to one of their most lucrative transactions – the IPO process? How can investment bankers and their clients work together to the mutual benefit of both parties, while maintaining confidence they’ll achieve the highest-value outcome going public?
In 2006, investment banks were at the top of the finance world
Fast forward through a crisis in the US mortgage market, the ruin of Lehman Brothers and several mammoth hedge funds, and a subsequent global recession – and the story today is a different one.
“There’s no question that the way these institutions function has shifted, pushed along especially by the financial crisis and technology trends. Even as the regulation pendulum swings back toward more limited oversight, how investment banks operate is fundamentally changing.” (CBInsights)
Helping companies going public has historically been one of the banks most lucrative transactions. Yet, in 2017 they generated just $7.3B in revenue from underwriting IPOs – a decrease of 43% from 2000. IPOs once accounted for around 25% of investment bank revenues, but in recent years that figure has decreased to about 15%.
Power shifts to tech companies
Today’s biggest IPOs are tech companies, who are using their new influence to negotiate lower interest rates than the banks have previously charged. Some have skipped the underwriting process entirely, listing themselves on the stock market directly.
Spotify and Slack are recent examples of well-established tech companies who have opted to undergo a DPO and avoid an expensive IPO process. (Slack’s recent public debut gamble has certainly paid off.)
Others still are choosing not to go public at all, which is putting increasing pressure on investment banks to cut costs and raise profit margins in other ways.
Investment banks still have a role to play
While it may seem like a good idea for private companies to avoid paying the hefty fees the banks charge for going public, IPO and DPOs are complex legal events that companies need to be guided through.
Investment banks still play a key role in networking and relationship building, helping companies gain the confidence of public investors. They take on risk on the company’s behalf and assist in navigating complicated legal frameworks.
Of 2018’s 7 best performing tech IPOs, according to Motley Fool, 6 used either Goldman Sachs or Morgan Stanley, or both, as underwriters. (CBInsights)
There’s undoubtedly still a place for investment banks, but they need to evolve to stay relevant. For both investment banks and pre-IPO companies to mutually benefit from the changing landscape, they need to automate and align processes and use technology to the advantage of both sides of the transaction.
The solution: Pathway to IPO
The potential benefits of going public formulate a long list, but so do the risks. For companies to succeed, they need to fully know every aspect of their business – no challenge unaddressed.
Much of the investment bank’s power comes from the prestige they confer on the companies they underwrite, so mutual trust is a major factor. Trust comes from full visibility and collaboration across the process end-to-end.
Ansarada’s IPO Pathway gives both sides the clarity necessary to collaborate, coordinate, and elevate the business to new heights.
Investment banks can…
- Set an IPO outcome for companies and set them up to maximize value
- Get a full picture of their client’s business on day one, minimizing risk and choosing those with the best chances of success
- Automate processes to save time and resources, and keep profit margins high
- Give their clients a clear path to guide themselves using best practice topic guides from thousands of other IPO transactions
Business leaders can…
- Surface gaps and risks upfront and address them long before going to investors
- Assign tasks, tick all the boxes, and keep team members accountable
- Ensure a safe and risk-free process
- Collaborate with confidence that they are on track towards a high-value outcome
Ansarada’s IPO pathway is the simplest and most efficient way for investment banks to unlock, raise and protect their client’s companies’ potential.
Whether you are an investment banker or a business leader considering an IPO, book a ‘lunch and learn’ session with our team and we’ll walk you through our IPO Pathway. (We’ll even bring the lunch.)