Losing the IPO Grip?

We have the benefit of working with over 100 brokerages and investment banks in more than 20 countries around the world. We help them communicate with and cover more than 480,000 individual clients at 70,000 funds and corporates in 173 countries. That gives us a unique macro view into the changes impacting the broader industry, and how all the participants are evolving.

Quite often I get the question: “So Blair, from your viewpoint, how do you think the industry is going to change over the next 5 years?” I really enjoy answering that question – partly because I love the intellectual challenge, partly because I enjoy the abstract thinking, and partly because it’s impossible to be right or wrong – the future is unknown.

However, one of the things I’ve been thinking about more and more recently is the opposite, famously coined by Jeff Bezos of Amazon; answering the question “what won’t change over the 5 years?

So, what won’t change in the capital markets? To provide a few of my high level thoughts, in 5 years, I believe:

  • Companies will still need to raise money to finance new initiatives, get investors and employees liquidity, and take risks

  • Investors will still be looking to invest their capital to earn a return, across a whole spectrum of asset classes, with the benefit of economies of scale

  • Governments will continue to borrow money to finance spending and investments, locally and abroad

  • Those three groups (and the others that come with them) will still need to be educated, connected, and facilitated, which will either be done through humans, technology, or a combination thereof

  • All the parties of the capital ecosystem will be looking to hit a certain ROI/ROE target – which means that as long as revenue pressures remain, cost pressures will remain

One of the reasons I’ve been thinking about this in particular was a recent article in the FT by Michael Moritz from Sequoia. He wrote an opinion piece titled “Investment banks are losing their grip on IPOs”. To me, it feels a lot like he’s missing the forest from the trees. Let me elaborate.

I have no disagreement with the thrust of his thesis that the vanilla IPO might be changing, morphing, or evolving. The process largely hasn’t changed in the last few decades, which means the timing is long overdue. There have been some headline grabbing direct listings recently (Spotify, Slack) that people herald as an end to the role of investment banks in taking a company public. I see it a different way though. I believe we’re simply seeing the process adjust as the broader industry adjusts, but we’re not seeing any fundamental changes to the underlying needs that originally drove said process and industry. Put another way, 5 years from now, companies will still be going public for the above reasons (raising capital, providing liquidity, etc.) but it might just look different. It might not be ‘going public’ at all, but they will still need to satisfy certain needs. That doesn’t mean investment banks will or won’t be key players in the process – it just means the process may be different.

To give a parallel view back to the technology world, there are so many similar stories where the medium of delivery or the appearance of the solution changed, but the underlying need remained and was still serviced, albeit in a different way, with potentially different players. Look no further than the above example of Jeff Bezos and Amazon. Industry pundits predicted the death of retail with the arrival of e-commerce, but we temporarily forgot that people still need to buy things. In fact, with all its efforts in ‘cashier-less’ retail, Amazon is arguably now the leader in physical retail as well as digital. Different solution manifestation, but same need. Retail as we know it is changing, but retail as we know it isn’t dead.

For another example, recall Facebook’s challenges with switching to mobile. The dominant platform changed (desktop to mobile) and genuinely threatened Facebook’s dominance – and I’m sure someone wrote “Facebook’s losing its grip on the social network,” but they ended up adapting, recovering, and moving on to greater heights.

In the words of Mark Twain speaking for every investment banker, “my death has been greatly exaggerated”.

Now don’t get me wrong, there are also lots of examples where the solution shifts (while servicing the same need) and the incumbents don’t adjust. Look at those on the other end of the physical retail shift – Sears, Toys R Us, Barneys, etc. – who didn’t adjust, and never recovered. The need from their customers was still there, they just weren’t in a position to effectively or efficiently service it.

So while I agree with the thesis that IPOs, along with the entire capital markets industry, is in the midst of a massive change, I strongly push back on the corollary that because change is afoot, the incumbent investment banks are in their twilight years and at the end of their life. If anything, the experience of satisfying those needs over the last few hundred years put those existing firms in a good place to address those continued truths, and come up with new solutions to evolving problems, if they are willing to embrace change and lead it themselves.

The death of the Capital Markets, Investment Banks, and Investment Funds is, in my humble opinion, grossly exaggerated. While the next generation of solutions may end up being delivered by new firms, or the incumbents, the problems they address solve fundamental issues and needs in our society, and are unlikely to change anytime soon. In channeling Jeff Bezos, I believe those issues will be the same long into the foreseeable future, but how they are solved, and the solutions, will be continually changing – and it feels like a new race is starting.

The only question now is, who will get there first?

Blair Livingston
Street Contxt

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