Are investment bankers who help new companies with IPOs taking too big a cut?
The investment banking industry is notoriously lucrative. Despite apparently fierce competition, they continue to collect high fees from companies seeking to go public. And now, it might be time for the players to explain how that’s happening.
In its latest Business and Finance Outlook, the Organization for Economic Co-operation and Development (OECD) called out large global banks for their high levies, according to the Globe and Mail. The report said the fees were “akin to tacit collusion,” which results in smaller companies getting discouraged from pursuing IPOs and a potential stifling of long-term investment.
“[T]he all-in fees charged by big banks are surprisingly high – typically between 9% and 11% of the proceeds from IPOs of less than US$100 million,” said the piece published by the Globe and Mail, citing figures from the OECD. “That’s a lot of money for advisory work that is finicky and demanding but not particularly risky or inspired.”
Under a normal market structure, those fees should go down under competitive pressure — a force which many assume investment banks are facing. Several explanations have been presented to explain banks’ gravity-defying profits, including rising concentration of big banks and the possibility of gains not being real (as was the case during the 2008 financial crisis).
The OECD’s report hints at something more sinister. Just twenty financial institutions typically account for about two thirds of all global investment banking transactions. Investment banks in each region of the world have effectively maintained or raised fees since the financial crisis, though the reasoning behind the different charges in different areas is unclear.
“Underwriting fees for IPOs, for instance, typically amount to 7% in the United States, 8% in Japan but only about 3% in Europe,” the piece from the Globe and Mail said. “In China, fees have more than doubled over the past seven years and now stand at 7%.”
The OECD said high fee levels and parallel pricing seem to have risen, effectively increasing the cost of equity and dragging down long-term productive investment. According to the organization, this could explain the small number of companies going public since the financial crisis, and could restrict economic growth over the long term.
In a survey of Canadian IPOs, PwC found that 2016 was the worst year, with only three new listings on the TSX for the whole year and just eight over all of Canada’s exchanges.
For more of Wealth Professional's latest industry news, click here.
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Will ETFs take the place of stocks?
2016 worst year for Canadian IPOs
In its latest Business and Finance Outlook, the Organization for Economic Co-operation and Development (OECD) called out large global banks for their high levies, according to the Globe and Mail. The report said the fees were “akin to tacit collusion,” which results in smaller companies getting discouraged from pursuing IPOs and a potential stifling of long-term investment.
“[T]he all-in fees charged by big banks are surprisingly high – typically between 9% and 11% of the proceeds from IPOs of less than US$100 million,” said the piece published by the Globe and Mail, citing figures from the OECD. “That’s a lot of money for advisory work that is finicky and demanding but not particularly risky or inspired.”
Under a normal market structure, those fees should go down under competitive pressure — a force which many assume investment banks are facing. Several explanations have been presented to explain banks’ gravity-defying profits, including rising concentration of big banks and the possibility of gains not being real (as was the case during the 2008 financial crisis).
The OECD’s report hints at something more sinister. Just twenty financial institutions typically account for about two thirds of all global investment banking transactions. Investment banks in each region of the world have effectively maintained or raised fees since the financial crisis, though the reasoning behind the different charges in different areas is unclear.
“Underwriting fees for IPOs, for instance, typically amount to 7% in the United States, 8% in Japan but only about 3% in Europe,” the piece from the Globe and Mail said. “In China, fees have more than doubled over the past seven years and now stand at 7%.”
The OECD said high fee levels and parallel pricing seem to have risen, effectively increasing the cost of equity and dragging down long-term productive investment. According to the organization, this could explain the small number of companies going public since the financial crisis, and could restrict economic growth over the long term.
In a survey of Canadian IPOs, PwC found that 2016 was the worst year, with only three new listings on the TSX for the whole year and just eight over all of Canada’s exchanges.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Will ETFs take the place of stocks?
2016 worst year for Canadian IPOs
