Merchant banks searching for the edge in legitimately making money by using information flows have been found as minority investors in private companies before their listing as well as advisers to the flotations – but not as often as they would perhaps have liked. Investment banks as investors, not advisers, have outweighed those advising after investing by three to one, according to data provider Dow Jones VentureSource.
From 1992 to end-March this year, investment banks have invested in 90 deals on which they subsequently advised, while missing out on 311 other flotations where they had also been a shareholder, Dow Jones said.
In the past month, Goldman Sachs missed out on the high-profile flotation of business network LinkedIn and promptly sold its shares at the initial public offering (IPO) only to see their value double in the first day’s trading.
On the other side, Morgan Stanley, which also worked alongside Bank of America Merrill Lynch and JPMorgan on LinkedIn, was a shareholder and adviser to biofuels company Solazyme’s successful IPO, which was also underwitten by Goldman Sachs and floated above the expected range at $18 per share, closing on the first day at $20.
On expected listings, the picture is equally mixed. Morgan Stanley has no brief to advise on the planned flotation of portfolio company BrightSource but is down to work on stock exchange Bats alongside Citigroup and Credit Suisse, where all three are shareholders. Dow Jones said Morgan Stanley had worked on 11 deals as both investor and adviser since 1992, while Goldman Sachs had done so on five.
The recent deals come as part of an increase in US listings. In the first five months of this year, IPOs on US stock exchanges have raised $21.3bn, up 233% from a year earlier, according to data provider Thomson Reuters. Corporate venturing-backed portfolio companies have in part sparked the reinvigorated US stock markets for flotations.
In December, E-Commerce China Dangdang, the country’s biggest book retailer part-owned by publisher International Data Group’s corporate venturing unit, gained 87% after its $272m IPO in the US.
And while LinkedIn’s IPO has sparked talk of a second internet listings boom, it would not be a case of history repeating.
One banker said: "In general, you are running into Finra and SEC [two US regulators] issues and have to work hard to keep the lines clear and avoid the insider dealing issues with this [investing in private companies and then advising on their IPOs]. The fallout from the dot.com boom [which crashed after 2000] created new rules on this part of the business."
The Dow Jones data, however, shows almost no change in the three-to-one ratio before and after the millennium, although the number of deals dropped, and a host of banks have been building up their advisory and investment teams in private businesses.
Last month, Citigroup hired Trip Wolfe as its head advisory banker working with venture capital firms, while earlier in the year JPMorgan set up a $1.2bn Digital Growth fund on behalf of its private clients to invest in social media companies, reportedly including social messaging group Twitter, and Goldman Sachs arranged for its non-US clients to invest $1bn in social network Facebook’s private placement.
As news provider Blogging Stocks said, investors had been trying to guess how the "Goldman Sachs business model will morph, especially as the firm moves away from proprietary trading. Interestingly enough, it looks like a part of the new strategy will be a focus on venture capital deals".