I’m still putting together my thesis on why the technology IPO market is broken (see my post on the sorry state of VC exits & IPOs in Q1 2009). But I’ll give you a clue as to my initial thoughts: 1) the whole IPO market is busted, so as a side effect technology IPOs are broken; 2) the big buyers of small-cap technology IPOs have left the building – I’m not 100% sure why but I bet it has something to do with the fact that in the late 90′s a bunch of crap was sold to them; and 3) something about trading fees being too low to support research analyst coverage of $250 million market cap companies, thus making these small technology companies harder for mutual funds to actively follow.
To the last point, a healthy investment banking industry is critical to getting IPOs done. Michael Butler of Cascadia Capital (a well known boutique investment bank based in the Pacific Northwest – when I was at Summit Partner we did some work with them and they knew their stuff) has recently written a blog post on PEhub on the state of the investment banking market and why/how it is screwed up. One his points really caught my eye.
They (banks) began competing against their clients when it came to trading activities and traditional investment banking activities such as M&A
The overall take-away: Fueled by public shareholder funding, investment banks essentially became hedge funds and PE/VC funds, and their core investment banking activities were relegated to secondary business lines.
Michael is very correct. When I was a baby banker with H&Q, the sexiest group to be in was M&A. A major reason for this is that it was the most profitable group. The M&A fees were often much higher than IPO/follow-on equity offering fees, and thus the group had a certain mystique. By mystique I mean the got PAID. About the time that I left the bank, the sexiest groups to be in became the in-house VC, PE and hedge funds. Why? Because they generated the biggest profits, and thus got a lot of clout within the bank – clout and compensation.
These groups aren’t client facing. As Michael points out, they actually compete against traditional clients of the bank. Did clients notice? Yeah, and they were often pissed. Did the banks care? Not really, because there was so much money to be made.
Now that there is less money in the alternative investment world to be made we will get to see if the banks revert back to a more traditional advisory/capital raising role. I’m not really that optimistic that the bulge brackets will be able to back away from their own trading/investing groups. But I am hopeful that smaller boutiques will fill the gap. However, this will require these smaller banks to be able to survive the current drought – not easy.
If we are going to see a return of the technology IPO market then we’ll need to see some active sales and trading desks at the boutiques. These sales guys are somehow going to need to identify mutual funds that have the appetite and $ to buy technology company IPOs. They also somehow need to make money – enough to support themselves and the research teams. How the heck this gets started is beyond me.
May 9th, 2009 at 6:06 pm
if anyone looked at that analyst bullpen, I think the last word that would come to mind is "Sexy." More likely "double helping of desert" and "an X-tra Large Pizza?"