The barriers to entry into underwriting sexy tech IPOs really shouldn't be that high. Like, it's not that hard. And, while much ink is spilled about how IPO underwriters are gatekeepers with a sacred trust to protect the public markets from dodgy companies, no firm has any official status that would give them an advantage in that gatekeeping function (as opposed to). But the top of the league table is pretty much who you'd expect if you weren't expecting much:
From a public perspective this is maybe a good thing. Despite the lack of any official recognition, there's something to be said for having IPOs - notionally the riskiest of public securities offerings, though, y'know - be underwritten by big-name long-established firms whose capital and reputation are theoretically on the line if the thing they're underwriting turns out to be a turd.
From a client perspective it's also understandable. At this point I could probably place the Groupon IPO from my couch, despite some questions about its valuation, because it's a household name in a sexy sector and investors are desperate for anything without a 1.0 correlation to Greek bonds. But there will once again come a time when the market cracks and a mortgage REIT heavily exposed to Florida development deals and Chinese forests has to drag its IPO kicking and screaming over the finish line. When that happens, the client will be very happy to be doing a deal with a league table leader who can call up its best clients and say "I know you don't normally buy IPOs in this particular sector, but remember that time I got you a big allocation on Groupon? Whaddaya say?" If you're Groupon it now appears that you don't need that kind of support, but you have to be pretty confident not to worry about that going into a six-month IPO process.
All that means that it's not easy to break into the market for bookrunning IPOs. You can't credibly make the case that your years of experience evaluating and blessing IPOs makes you a good underwriter if this is your first IPO. And, more importantly, you'll have a tough time convincing clients that you'll be able to drag investors into a struggling IPO if those investors don't have any track record on which to feel loyal to you - "we just hired a really sweet social media analyst" probably won't cut it. And while this isn't a tragedy, exactly, in a world of worrying about systemic importance you might hope that there's at least some way for a competitor to break into the club of IPO underwriters.
That's why I'm impressed that someone seems to have discovered a backdoor way into the business:
SecondMarket Inc, a leading player in the market for private company stock, is trying to get a piece of the initial public offering of Groupon Inc, according to an email obtained by Reuters on Monday.
SecondMarket Senior Vice President Jeff Thomas emailed potential investors on Friday who previously traded through the firm to see if they were interested in buying Groupon shares in the IPO.
Dan Primack at Fortune has more details; SecondMarket is apparently a co-manager, not a bookrunner, earning a selling concession on whatever it places with its investors. So it's got a ways to go before it's really competing for IPO business. But it's a good start.
It's a good start not only because SecondMarket has a differentiated "we can find you buyers" pitch. It does - it probably has a better sense of who's buying in the private secondary market than do the company or the lead underwriters, and while some of those buyers are small money investors (something like half of their volume is "accredited individuals," which can mean anything from Bill Gates to me for the next three months), some are the sorts of hedge funds who might very well play in an IPO.
But SecondMarket's pitch also has a good "help your investors" vibe. Companies - even private companies - are supposed to be run for the benefit of their shareholders, and management tends to take that to heart. Investors who have supported Groupon in the private secondary market may well think that they deserve an early crack at the IPO, and Groupon may well agree with them. While Groupon doesn't really need SecondMarket to do that, there's a reasonable story to be told that the firm that does the secondary market trading is best positioned to know who are the biggest supporters of the story, and the most likely long-term holders, and to allocate to those investors.
For SecondMarket the benefits are obvious. In part, as Dan Primack says, it's "a brilliant hedge" against the likelihood that the IPO comes below the $20bn levels that Groupon fetched in the private market, and the risk that clients who bought there feel screwed and hold it against SecondMarket: in exchange for their early investment, those clients will get not only the chance to lose money in the private market but also the chance to get in on a hot IPO. (Or, just to lose money in the public market, hard to say.)
In part, it's a way to build goodwill with private companies whose shares you trade. Not every private company likes their employees to be able to sell in the secondary market, for both regulatory and incentive reasons. SecondMarket's story to those companies sounds much better when it's "let us help you position for an IPO where we can help execution" than when it's "yeah, your employees just don't think you're going to last long enough to cash out publicly, so we're helping them get out while the getting is good."
And, of course, there's boatloads of money. You get IPO fees - 5% [update : 6%] for the Groupon underwriting group, though of course much less in selling concessions for co-managers, which in fact probably compare unfavorably to SecondMarket's brokerage fees - on a huge ticket ($11 billion700 million or so, versus under half a billion in total secondary market transactions in all names for SecondMarket so far this year). That is a sweet, sweet payday for SecondMarket. It's a sweet payday for anyone, actually, which many think is why Goldman did the Facebook private placement - to position itself to lead Facebook's IPO.
As the public markets get larded with distasteful regulation, and as the tech industry decides that being private is this year's version of the old take-out-tons-of-money-in-an-IPO, private financings are enjoying a renaissance. This is not exactly a tragedy for Wall Street, as many of the big banks actually do okay in the private placements business - but it's certainly a business that leaves more room for upstart advisers. It will be interesting if more of them can use that business as an opportunity to break into the bigger, public one.
What's the deal with Groupon and SecondMarket? [Term Sheet]