FILE PHOTO: Signage for Lyft is seen displayed at the NASDAQ MarketSite in Times Square in celebration of its initial public offering (IPO) on the NASDAQ Stock Market in New York, U.S., March 29, 2019. REUTERS/Shannon Stapleton/File Photo
Lyft has struggled and is stalled well below its offer price © Reuters

Wall Street’s IPO machine is humming.

Fresh off the high-profile listings of ride-hailing company Lyft and scrapbooking site Pinterest, Uber is expected to go public next month in what looks like one of the largest US tech IPOs ever.

Other smaller and less well-known companies in various sectors are also in the mix. Beyond Meat, a California-based company that makes vegan burgers meant to replicate the look and taste of beef, is set for an IPO next week, while Luckin Coffee, the fast-growing Chinese coffee-selling company that aims to be larger than Starbucks there, has also unveiled plans for US listing.

With US stocks hovering near record highs, and the economy doing fine for now, more are likely to follow.

But it will take time to know which (if any) of the latest crop of tech IPOs will be winners.

Lyft, for example, has struggled and is stalled out well below the offer price. Shares of online scrapbooking site Pinterest, by contrast, are comfortably in the black. But the reverse could easily be true three months or three years from now.

Companies, too, can pay a price for public ownership. That includes leaving “too much money on the table” — Wall Street parlance for selling shares too cheaply. There are also new burdens involved in being a public company. The shareholder base, for example, now includes shorter-term investors with a fixation on quarterly results, making the stock price vulnerable to swings.

One group, though, has clear early gains: bankers.

“There is no question that, in the short run, it is good times for the middle men,” says Jay Ritter, a finance professor at the University of Florida. “It will definitely be a good year for fee income on IPOs.”

Wall Street investment banks act as the main go-between for investors and companies in IPOs. Fees for banks that underwrite IPOs are charged as a percentage of the proceeds raised.

Over time, these fees have fallen: to below 6 per cent on average so far this year, from 7 per cent and higher in the late 1990s, according to Dealogic. But they vary considerably depending on the size of the offering.

Companies that raised more than $1bn have paid an average of 4.42 per cent of proceeds year to date and 3.88 per cent in 2018, compared with 3.55 per cent 20 years ago. Very hot, consumer-facing tech companies are also likely to have banks competing fiercely for the business and may be able to negotiate terms.

In 2014, for example, China’s Alibaba paid 1.2 per cent when it raised $25bn in the largest ever IPO. Visa, the payments company, paid 2.8 per cent on a 2008 deal that raised almost $20bn. Facebook’s fees in 2012 were 1.1 per cent for a $16bn IPO.

With a rush of large tech “unicorns” — companies valued at least $1bn in private markets — and “decacorns,” valued at $10bn or more, the maths point to a big haul for banks this year.

Consider Lyft. The company raised more than $2.5bn, paying underwriters 2.75 per cent, or $70m, including an overallotment option, according to Dealogic. Pinterest, which raised $1.6bn, had a fee of 4 per cent, or $66m.

The fee pool is not evenly distributed among the group of underwriters which, in Lyft’s case, included 29 banks. That increases pressure on bankers to land the top spots on the very biggest offerings.

The two or three banks that lead the deal are allotted more shares to sell and they work more closely with corporate executives to usher the company through the IPO process, so take more of the pot.

For the Lyft deal, lead managers JPMorgan and Credit Suisse took in $23m and $19m, respectively, in total underwriting fees, on Dealogic figures. On Pinterest, top banks Goldman Sachs, JPMorgan and Allen & Co made about $21m, $20m and $8m, respectively.

Uber is this year’s really mega-deal. The company said on Friday that it plans to raise as much as $8.5bn at the midpoint of its price range of $44 to $50 a share, before the overallotment option. Even a fee of 1.5 per cent would bring in about $128m for a single deal. Morgan Stanley, Goldman and Bank of America Merrill Lynch, as lead underwriters, should take the lion’s share.

As the world waits to see if the next Microsoft or Amazon is among the rush of IPOs this year and next, and newly minted companies turn their attention to delivering on their IPO pitches, Wall Street will not much care. It will have already booked its gains.

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