If you’re looking for evidence that the financial world is entering the ‘Roaring Twenties’, the publicly traded markets might be a good place to start. The IPO market is red hot, and 2021 is shaping up to be another bonanza year. It’s still only August, but there have already been 672 IPOs on the U.S. stock market this year, which is up nearly 400% from the same period in 2020.
A couple of things are striking about this listings stampede. We’ve seen the renaissance of public markets as a venue for pre-revenue companies and a resurgence in the value of those public markets away from the private markets. This has come in tandem with innovative companies brandishing products or solutions that address larger investor interests, including cryptocurrencies, ESG and climate change.
This all points to a resurgence in the power of capital markets for fostering innovation and advancement of companies, corporate governance, and entrepreneurship that for decades was taken away by private equity. Capital markets firms have a tremendous opportunity now to reinvent themselves as sponsors of innovation, entrepreneurship, and purpose.
It’s remarkable to see retail investors validating innovative, entrepreneurial and purposeful companies in their droves. Take the U.K.-based fintech Wise: Just three years ago, the company was a plucky, privately-held unicorn with a value of $3.5 billion. But after listing earlier this month it closed its first day of trading with a market valuation of nearly $12 billion.
Many of these companies are restacked for the world of tomorrow; they are cloud native and customer-experience driven first. And they need a responsive, engaged and tech-savvy capital markets ecosystem in order to flourish. Despite this, many capital markets firms risk squandering this once-in-a-generation opportunity because they might not ready to service this type of company.
Capital markets need to take radical action in two areas: Embedding technology deep into the fabric of their organizations while at the same time ensuring they have the capabilities in place to ensure they can demonstrate deep connectivity in the markets and offer valuable insights.
It is not hyperbole to talk about the IPO and M&A booms as lifelines for the sell-side. When the COVID-19 pandemic hit, many investment banks had just commemorated a dubious anniversary: A whole ‘lost decade’ of meaningful revenue growth. The stagnation had its roots in a shrinking public market and slowing capital raising activity. In the late 1990s, there were around 8,000 companies trading on the NYSE and Nasdaq NDAQ +0.9%; by 2016, that had fallen to approximately 3,600.
Capital markets have been quick to capitalize as the publicly traded markets roared back in 2020. For example, Accenture’s Capital Markets Vision 2025 report has calculated that the aggregate revenues of the top 16 investment banks climbed to $285 billion in 2020, which is roughly back to the heyday of a decade ago. But if firms don’t use those revenues to definitively change the way they do business, they might regret it.
Whether they are buy-side or sell-side, many firms are simply not cut out to service this kind of client. We will likely see an army of funds and investment banks offering themselves as counterparties or conduits for cash during this public market bonanza, enjoying a short-term bounce in revenues that diminishes soon after. But the firms who are looking to foster innovation, entrepreneurship and social purpose within public markets, rather than just position themselves for profits, look set to flourish for years to come.
Firms will also need to adjust their strategies for purpose, as well as profit. It was barely three years ago that the Business Roundtable broke with two decades of tradition to state that corporations existed not just to serve their shareholders, but their customers, employees, suppliers and communities. I have also written before how the rapid reorientation of the corporate mission towards ESG issues could wrongfoot firms that define themselves too narrowly as stewards of capital.
This means that the average firm will need to take drastic action if it wants a slice of the capital raising spoils. Their priority is harnessing digital technology that allows for smooth intermediation between issuing companies and the public market. Cloud and Infrastructure as a service (IaaS) technologies should be the bare minimum in this regard. Firms can also leverage analytics, artificial intelligence (AI), distributed ledger technology (DLT), native security layers (SaaS) and a full DevOps environment, which will give them flexibility, speed and a wealth of actionable insights. For example, AI can help the sell-side deliver extra value and liquidity to an issuing company by predicting likely investors for a SPAC.
Firms also need to have the ability to offer world-class advisory services and that job goes far beyond just having the right talent. The new breed of listing companies will only become clients if firms can wield a deep understanding of their markets and demonstrate their unparalleled connectivity to them.
Capital markets will need to strike while the iron is hot: immediately. Gone are the days when Wall Street always used an investment bank for their IPO, and very soon, firms making their debut might not need anyone at all. The U.S. Securities and Exchange Commission announced in December 2020 that it will allow companies to raise capital through direct listings. It won’t be long before issuing companies start cutting out the middlemen and self-underwriting. If capital markets want to ride the IPO wave, they’ll need to take action now.
Whether they are underwriting the flotation of a fintech giant or purchasing a large stake in a startup that is listing via a SPAC, capital markets have a golden opportunity to reinvent themselves as sponsors of innovation, entrepreneurship and purpose. If they take decisive action now, they may one day be feted as the champions of a fourth industrial revolution.