Companies Turning to Private Funding in Low-Rate Market
U.S. banks are losing one of their most important income sources: making money on advising companies how to sell their shares to the public. According to a study by Dealogic Ltd, published in The Wall Street Journal, revenue from initial public offerings (IPOs), is at its lowest level in more than 20 years.
Banks have earned just $3.7 billion in fees from U.S.-listed equity deals which, other than IPOs, also include share sales for companies that are already public, and convertible-debt issues. (Source: “Wall Street’s IPO Business: The Worst in 20 Years,” The Wall Street Journal, September 22, 2016.)
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The biggest reason why this important source of income is drying up for banks is that companies are going for private funding instead of taking the expensive equity route. The U.S. benchmark interest rates remain close to a record low as the Federal Reserve Bank tries to boost growth in an economy hurt by a housing collapse after 2008 financial crisis.
And there is no urgent need to raise these rates at a faster pace, suggested a policy statement by the Fed on interest rates yesterday.
Data prepared by Dealogic showed that as of Friday, just 68 companies had gone public on U.S. exchanges this year, raising $13.7 billion. This is compared to 138 companies that had listed on U.S. exchanges in 2015, raising $27.3 billion in that year. This translates into a 62% drop from the same period a year earlier. (Source: Ibid.)
IPO business is one of the most lucrative for banks, as fees through underwriting and advisory services may bring cuts as high as seven percent for deals that are smaller than one billion dollars, according to Dealogic.
U.S. equity markets are near their record high, propelled by expectations that the economy is on the right track and the Federal Reserve will continue to keep interest rates low. But the cyclical nature of the stock market and interest rates is keeping hopes alive among bankers on the revival of IPO deals. According to the Wall Street Journal, this is probably the reason why banks aren’t laying off staff working in equity advising roles.
