SPACs Rescued Wall Street From the Covid Doldrums
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
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
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
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
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 firstname.lastname@example.org
(END) Dow Jones Newswires
January 22, 2021 05:44 ET (10:44 GMT)
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