3 ms·

"Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with." No, the banks get underwriting fees as a % of the offer, so they

by jariel 6y ago

"Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with." No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. The 'winners' are the folks who get to buy from the underwriting bank and that's opaque: it could be 'the same banks clients', and so they get some major favour points for those allocations, and their own private wealth managers would ostensibly get a cut, but that's quasi insider stuff. The banks 'working with the IPO company' lose money with a price that's too low. Even if you were to say 'oh, the other parts of the banks are working for some action' the answer to that is, well, bankers are 'very me first' and I don't care who it is, the underwriting team wants to make as much money as they can, it's their personal bonus, and they're going to maximize the price. They don't care about the 'private wealth management teams' bonuses, they care about their own. AirBnB I guarantee literally had some of the world's best bankers on the case. There's just a lot of variation in very frothy markets and it's hard to estimate demand from far flung corners.

kumarvvr 6y ago
> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. What is the counter balance to this? Obviously banks can value a share at abnormally high prices and take a big fee, but clearly that is not happening.
- nemanja 6y ago
  Counter balance is the free market - if you set the price too high, investors will not buy into it and the price will be adjusted down.
- jariel 6y ago
  The counterbalance is that they are underwriting the stock, meaning, they are actually buying the stock from the company, and then selling it into the market. The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously. So if the underwriters price too high, they are stuck with shares. The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc.. Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility. Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'. Nice, clean, straightforward, not a lot of volatility. Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'. So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.
reissbaker 6y ago
IPOs for banks are repeat businesses: they'll be selling many different companies to the same institutional investors over the years. If you don't get your investors a pop, they'll be less likely to buy the next time around. The incentives are a little more complicated than just the underwriting fees — and the underwriting banks often both get a % fee and a flat fee, the latter of which is less useful for aligning incentives on pricing with the company going public (but useful for aligning incentives with the investors). That being said, seemingly-paradoxically, despite big pops being bad for the companies, they're actually typically good for employees. RSUs will typically turn into shares at IPO time and the entire bundle of shares will be taxed as income according to the listing price; a giant pop means you get higher dollar value shares while paying less tax, assuming you then hold onto them for a year and pay long-term capital gains tax on the difference between listing and pop price rather than selling immediately and paying short-term tax. Waiting a year to sell isn't that unlikely, since employees often aren't even allowed to sell at all for the first six months.

by jariel 6y ago

kumarvvr 6y ago

> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. What is the counter balance to this? Obviously banks can value a share at abnormally high prices and take a big fee, but clearly that is not happening.

nemanja 6y ago
Counter balance is the free market - if you set the price too high, investors will not buy into it and the price will be adjusted down.
jariel 6y ago
The counterbalance is that they are underwriting the stock, meaning, they are actually buying the stock from the company, and then selling it into the market. The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously. So if the underwriters price too high, they are stuck with shares. The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc.. Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility. Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'. Nice, clean, straightforward, not a lot of volatility. Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'. So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.

reissbaker 6y ago

IPOs for banks are repeat businesses: they'll be selling many different companies to the same institutional investors over the years. If you don't get your investors a pop, they'll be less likely to buy the next time around. The incentives are a little more complicated than just the underwriting fees — and the underwriting banks often both get a % fee and a flat fee, the latter of which is less useful for aligning incentives on pricing with the company going public (but useful for aligning incentives with the investors). That being said, seemingly-paradoxically, despite big pops being bad for the companies, they're actually typically good for employees. RSUs will typically turn into shares at IPO time and the entire bundle of shares will be taxed as income according to the listing price; a giant pop means you get higher dollar value shares while paying less tax, assuming you then hold onto them for a year and pay long-term capital gains tax on the difference between listing and pop price rather than selling immediately and paying short-term tax. Waiting a year to sell isn't that unlikely, since employees often aren't even allowed to sell at all for the first six months.