“Capital markets” is an industry comprised of people who know people with money. The people who operate in “capital markets” find money for companies/people that want it. The best way to get money is to sell shares of common stock. It is NOT debt or getting a loan/mortgage… it is sharing hope / upside profit in a business. As a founder / owner of a company, this is how you “get rich”. Here’s the story of the Snowflake initial public offering (IPO) of common stock (as I imagine it):
When a company wants to “go public”, they’ll approach a bank / financial institution with relationships with people with money. So Snowflake said “we want to do an IPO, who wants to help us?” Goldman Sach, JP Morgan, and Morgan Stanley put in bids to do the work and Snowflake chose them over others. The firepower of these banking institutions is their relationships with people with money… massive amounts of money. Those people with MASSIVE money get access to the deals that these banks create… like the Snowflake IPO. This relationship is how the rich get richer and how our government, through the banking system, enables it.
Snowflake hired these 3 “underwriters” (that word sounds better than “salespeople”)… to get “indications of interest”. These bankers and their “relationship managers” emailed their clients (who have MASSIVE money) with slick marketing flyers that asked, “hey, this high growth tech company called Snowflake is going public… do you want to own some shares?”
The clients email back, sure! If everyone replies back enthusiastically, the IPO is now healthy and has a path to profitability. The underwriters then go back to Snowflake and say, “based off our client surveys, we think we can generate $1.5 billion dollars with an IPO right now.” Snowflake says, cool…. let’s do it, OR hmm… let’s wait, that’s not enough, we are worth more.
Snowflake said YES, because 1.5 billion is a lot of money at a very high valuation. So the “underwriters / salespeople” say to Snowflake, “28 million shares should be created (out of thin air)… and if they are priced at $50 per share, we can sell them to our clients (with MASSIVE MONEY) no problem and raise around 1.5 billion.”
Snowflake says sure! Let’s give it a go. So now the “underwriters / salespeople” go to their clients with a price, $50 per share… there are 28 million shares to sell and Goldman Sachs, JP Morgan, & Morgan Stanley all COMPETE with one another to sell those shares at the highest price possible to this pool of private banking clients. You can think of the movie Boiler Room here if you need an image in your mind. They are creating a market and really trying to create a bidding war (like a realtor would when trying to sell a house).
Now the “Underwriters / sales people” (also called “market makers” to be fair) have a fine line to walk… they want to price the shares to raise as much money & generate as much commission/fees as possible, but also maintain good standing with their most valuable assets… their relationships with people with MASSIVE money.
So the underwriters / banks / salespeople / relationship managers sold these IPO shares of Snowflake at $50 per share and they sold like hot cakes! The IPO was “over-subscribed”, demand exceeded supply. The underwriters settled at $120 per share.
Settling at $120 per share is a bit of an art and science. Each of the 3 underwriters / sales people (Goldman, JP Morgan, Morgan Stanley… that Morgan guy really knew how to bank)… received around 9 million shares to sell… and they had to give them out like highly coveted Tickle Me Elmo dolls at Christmas. These things are hot cakes! Everyone wants one. The Snowflake IPO was so in demand that the casual millionaire was not “high status” enough to get shares! Only the Buffets, Benioffs, (i.e. ultra high net worth people) and HEDGE FUNDS were given a taste of that sweet sweet IPO.
The IPO went public yesterday (9/16/20) on the NYSE at $245 per share! The super high status clients purchased the IPO shares for $120 each… and they opened to the public at $245! By being included in the IPO… you had an over 100% return on investment… just like that!
The underwriters want to create a “pop” when the stock gets listed on the NYSE to the general public (i.e. you and I) because they want to “hook up” their clients. However, they also want fees associated with a high IPO price since they receive commissions as a percentage of each share sold and 2% of a high share price is better than 2% of a low share price (disclosure: it doesn’t always work this way but let’s continue with the story). The difference between the IPO & the publicly listed price is how the clients get “hooked up”. The pricing disparity of the Snowflake IPO… is kind of shameful.
The Snowflake IPO was a favor done by the underwriters (i.e. bankers) to “hook up” their friends… the hedge fund managers (who used to be co-workers and remain future business partners). These people who are supposed to be the smartest investors in the world were “short” the market during April, May, June, & July when the S&P 500 just ripped higher. They were incorrect in a BIG way at doing a job they are supposed to be good at doing. These friends of bankers were under performing and needed a helping hand to keep their jobs… so an IPO “POP” like this really helped them make up ground to their performance benchmark… justifying their existence.
This story might be a bit cynical, but that doesn’t mean it’s not true. The Snowflake IPO price & public listing price was so far apart that the only reason I can find is that “friends” needed a bailout. The majority of fund managers (i.e. 90%) under perform the index fund they compete against. 90% of the “smartest investors” are below average. Of course these “smart investors” get access to the Snowflake IPO to help. Did you get a piece of the Snowflake IPO? If not, investing in the index is the way to go… which is what our core fund lineup is. Or at least socially responsible investing if you want in on this game of money, power, and influence.