- Banks with large equity underwriting desks should benefit from a stable stock market and rising valuations
Equity underwriting, or underwriting IPOs and follow on offerings, is a well followed industry practice, as both retail and institutional investors like to be allocated shares in new, fast growing companies. Equity issuance generally takes two forms, initial public offerings (the first time issuance of shares by a company) or follow-on or secondary offerings (when an already public company issues more shares to investors). The fee rates in the equity investment banking departments are some of the highest on Wall Street, as the banks involved have to correctly value the stock, market the new issue, and then ensure orderly trading once the security is issued. In the recently calculated league tables for 2012, the 5 top banks for equity underwriting include Morgan Stanley (MS), Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C), and Bank of America (BAC).
Equity underwriting league tables were crowded at the top in 2012, with 4 leading banks within $2 billion of league table issuance of each other. Morgan Stanley took the top spot last year with over $51 billion in new stock issuance running through its investment banking department, while Goldman Sachs settled for second position at over $50 billion.
Most of the time, top banks are all on the same equity deals, however the proportions of the fee splits can differ as a lead underwriter would take a bigger percentage of underwriting fees for doing more of the analysis and marketing, while a co-underwriter both takes less risk and does less work. Fee rates for equity underwriting tend to be some of the highest on Wall Street with an IPO fee in a range of 4.0-6.0% of the amount of stock issued. Secondary or follow-on offerings have much lower billing rates with a fee schedule between 1.0-3.0%. Thus for an $100 million IPO, a syndicate of investment banks would split a $4-6 million fee.
Some of the flagship IPOs of 2012 included the $700 million new issuance of Workday, an enterprise software company, which priced new shares at $28 in August 2012. The stock now trades at over $55 per shares. Bright Horizons Family Solutions, an education services company, also had a successful issuance of new shares. Its IPO priced in October at $22 per share, and now trades at over $27 per share in 2013. As the stock market continues to stabilize and valuations climb, we may see more IPOs and follow-on equity offerings in 2013.