By David Benoit 

In 2020, underwriters were the kings of Wall Street.

The biggest investment banks recorded better-than-expected years, even though a global pandemic sent shockwaves through businesses and households. No business grew more than their operations selling stocks.

In the spring, clients bracing for economic trouble turned to stock markets to raise cash. In the latter part of 2020, it was the SPACs -- special-purpose acquisition vehicles -- that raised billions of dollars as a quick and suddenly popular way to get more companies into the public markets' wide-open arms.

The banks' fourth-quarter results provide fresh evidence of the equity-underwriting hot streak, raising hopes that SPACs may continue to boost the banks' results even as the overall economy shows signs of slowing down.

A SPAC is a public entity with no business that raises investor funds through an initial public offering. That so-called blank-check company seeks a merger, allowing its new partner to go public without the delays and demands of a traditional IPO. They were a quiet corner of Wall Street for years but surged in popularity in 2020. SPACs raised $82 billion in the U.S. last year, greater than all of the money previously raised, according to Dealogic.

At Goldman Sachs Group Inc., which underwrote more new equity in the U.S. last year than any other bank, according to Dealogic, its equity bookrunners brought in more revenue in the fourth quarter than its famed deal makers for the first time.

Goldman's equity underwriting brought in a record $1.12 billion in fees in the fourth quarter, nearly triple what it had the year before. For the year, the business took in $3.41 billion in fees, more than double 2019's $1.48 billion. (Its advisory unit brought home $3.07 billion.)

At Morgan Stanley, No. 2 in the equity-underwriting business for the year, fees more than doubled in the fourth quarter. For the year, they rose 81% to $3.09 billion, also eclipsing deal making fees.

JPMorgan Chase & Co. came in third in equity underwriting, boosting its fees 88% in the fourth quarter. Fees surged 66% for the year, to $2.76 billion.

The boom wasn't all SPACs, but those surging deals helped lift several banks. Citigroup Inc. went from sixth place in initial public offerings to third place, according to Dealogic, in large part because it was second in helping launch new SPACs. Its equity-underwriting revenue increased 83% in the fourth quarter and 64% for the year, big gains for a bank that is historically stronger in the debt world.

And smaller Jefferies Financial Group Inc., a big SPAC supporter, put out a quarter one analyst said was "unlike any earnings report that we have seen." It more than tripled its equity underwriting fees to $341 million. For the fiscal year, which ended in November, equity underwriting fees totaled $902 million, up from $362 million in 2019.

"They were nothing short of extraordinary," wrote Oppenheimer & Co. analyst Chris Kotowski.

Whether the trend continues was high on the list of analyst questions for Wall Street's executives on earnings calls in the past week.

Executives said the new year has started strongly. And some said the SPAC boom helps fuel future revenue opportunities too. Newly public companies often raise additional funds quickly, and require other services the banks provide as well.

"Obviously, we've seen very strong performance as it relates to the SPAC space and equity capital markets and that will continue into 2021," Citigroup finance chief Mark Mason said on a conference call.

Yet Citigroup and others said it was too early to tell if it would duplicate 2020 and warned the market's fickle nature, along with a still-raging pandemic, could upset the trend.

Goldman Chief Executive David Solomon was the most forceful in warning the SPAC trend was getting overheated. He said his bank was sitting out some deals and watching with some trepidation the big paydays investors who start SPACs are collecting.

"You have something here that is a good capital markets innovation, but like many innovations there's a point in time as they start where they have a tendency maybe to go a little bit too far and then need to be pulled back or rebalanced in some way," Mr. Solomon said. "And that's something my guess is we'll see over the course of 2021 or 2022 with SPACs."

Write to David Benoit at david.benoit@wsj.com

 

(END) Dow Jones Newswires

January 22, 2021 05:44 ET (10:44 GMT)

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