Wall Street 2.0
Investment banking is seeing its historical profit centers eroded by technology and regulations. Core processes are being automated or commoditized.
Progressive Investment Banking
The biggest players in asset management, firms like Vanguard with total assets under management (AUM) comes close to the total AUM at the top banks.
Across equity research, sales & trading, technology is replacing humans to fight poor performances and new regulations, as banks have figured out they can do more with less. Powerful tech-companies fueling the world’s biggest IPOs, embarking on their influence, their size and name recognition to extract lower fees from the investment banks facilitating.
From 2000 till 2017, investment banks saw 43% less revenue from underwriting IPOs. IPOs once accounted for around 25% of investment bank revenues, decreasing to about 15% in the recent years.
In 2012, when Facebook went public in the stock fell 15% in its first few days on the market. Despite this, the Wall Street Journal reported that Morgan Stanley, Goldman Sachs, and the company’s other underwriters made $175M in fees.
Some accused investment banks of mispricing stocks, alleging that the banks deliberately underprice new stocks in order to engineer a “pop” on their first day of trading — benefiting the bank but also the institutional investors that the bank brought into the stock. For example, the dotcom company eToys filed suit against Goldman Sachs (its underwriter) for having the firm convinced it to open up its listing at $20. The stock price jumped in the first day of trading more than 4x, but months later the company collapsed.
Many firm now are exploring alternatives to the IPO, like the direct public offering (DPO), initial coin offering (ICO), security token offering (STO), initial exchange offering (IEO) which all leverage from Blockchains-enabled tokenization of assets, allowing fractional sales to a broader investment crowd. Perhaps large companies are choosing not to go public at all.
For example, Telegram, a messaging app giant with over 200mil monthly active users, was without a doubt targeted by Wall Street investment banks for potential IPO. Instead, the firm raised whopping $1.7 billion from two cryptocurrency sales (ICO) in March. As a result, Telegram had access to IPO-sized, non-dilutive capital with few strings attached, and with far less hassle than publicly-traded companies face!
Tokenization can also be solution for in distressed financing: For example, Eastman Kodak (NYSE: KODK), a public company that was raising covenant-free capital via an ICO. Kodak’s stock price was as low as $3.10 in January 2018, implying that the company has lost access to traditional financing markets, before it announced plans for an ICO.
It’s all about simplicity and convenience.
Market listings are also disrupted. Technology companies are looking to cut the cost of going public and simplify the listing process by creating alternative exchanges. This includes the Investor’s Exchange (IEX), the Long Term Stock Exchange (LTSE), or TZERO (for Security token, Cryptocurrencies) which aim at high exchange access and listing fees charged by major exchanges like Nasdaq and the New York Stock Exchange (NYSE).
Security token issuing (Coincierge, Securitize, Moonwhale) and trading (Open Finance, Sprinkle Exchange, Moonwhale) portals are creating a Blockchain-based distributed ledger platform for capital markets, opt to fuse traditional finance with the benefits of crypto token economy and the tech aspect of the asset/ equity sale, to empower the issuer to be completely compliant with a fraction of the cost of traditional IPOs.
Coin offerings long-term future as a mean of fundraising is still uncertain. Instead of going public, or raising equity financing, companies now issue their own cryptocurrency, avoiding the need for bankers at all. In 2017, startups raised $5.6B from ICOs worldwide for very early-stage companies, the idea of selling digital shares in a company directly to consumers using Blockchain technology, offers a alternative to the public stock market.
Furthermore, many institutional investors, hedge funds and family offices have already entered the sector, and pension funds and mutual funds are starting to dip their toes in as well.
Cryptocurrency capital markets - which are less than 3 years old - are challenging the supremacy of traditional investment banks for raising new capital.
Today, funds like the $100B SoftBank Vision Fund have been pouring hundreds of millions into companies that may have otherwise looked to raise cash in the public markets. Incubators and Accelerators like XCEL ASIA guide startups through all rounds necessary to realize their projects. The approach of staying private does offer startups far less scrutiny from regulators and freedom from the pressure on quarterly results that public companies are subject to. XCEL ASIA unique approach leading Hard Tech venture builder and investor in Asia, covering most rounds a firm would need to successful build their business, with its Xcelerators (Pre-Seed) and the VC and Digital Fund (Seed to Series A equity investing) in follow-on and new deals.
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Sources: CB Insights, Seeking Alpha, Forbes, Crowdfund Insider, IWS FinTech