Today’s FT has a special supplement on equity capital markets, the part of an investment bank that helps companies to raise equity capital. One article mentions the well known fact that IPO fees remain very much unchanged for year after year. In the US the average is 6.7% – that means that if you raise $100m you pay $6.7m to the underwriting investment bank. That’s on top of legal fees (about $1m) and the time management spend on preparation. The US is supposedly the world’s most efficient capital market but these fees are more than double those in Europe and Asia.
In any market where there is persistently no price competition, there are two likely causes. One is a lack of competition and the US IPO market is, in effect, a tight oligopoly where few foreign banks have been able to break in. Secondly, competing on price may signal lower quality. Until recently all hedge funds charged 2% and 20% (a few charged more). Any that offered lower rates might have seemed to lack confidence in their investment ability. Many professional service firms barely compete on price for similar reasons.
So it’s hard to square the static IPO cost with a claim that this is a highly competitive industry. But how to get more competition? It’s very tough when people care about reputation and for many people the IPO is one of the most important events of their careers – so they’re not motivated to shop around for what might be an inferior service.
Which explains why, when volumes are high, equity capital markets is a very profitable business – but very hard work for the investment bank employees who are rushed off their feet.