Spotify puts bank IPO paydays under fund manager scrutiny

After shaking up the music industry, Spotify is now prompting investors to question the value they get from investment banks underwriting new listings with its low-cost IPO. The music streaming firm effectively deprived banks of hundreds of millions of dollars in fees by shunning them in its $26.5 billion New York Stock Exchange float on April 3.
Banks can charge companies as much as 7 percent of the amount raised in a US listing and fund managers in London, another of the main centres for initial public offerings (IPOs), say Spotify's success means underwriters will now have to show more clearly what value they bring to companies and their backers. "Besides saving the right type of company a lot of money, the real positive demonstrated by this kind of listing is the level playing field it creates," Trevor Green, head of institutional equities at Aviva Investors, told Reuters.
Banks have been richly rewarded for co-ordinating IPOs and ensuring companies raise the money, pocketing annual fees of $33.6 billion in the US and $14.4 billion in Europe over the last decade, Thomson Reuters data shows. And although tussles between investment banks and asset managers over these fees are not new, evolving technology, more freely available capital for privately-held companies and regulatory pressures mean changes could now be on the cards.
But while critics claim that high costs have discouraged some firms from joining the stock market, crimping their prospects and hindering the growth of the economy, bankers say few are likely to be able to replicate Spotify's direct listing.
This was only possible because a large number of founding shareholders wanted to sell and it was not raising a large sum of capital, meaning that for now, the route may only be open to well-known, highly valued internet firms like Spotify.
"It's a one-off," Suneel Hargunani, Head of EMEA Equity Syndicate at Citigroup, said on Wednesday of Spotify's listing.
"There's not a lot of companies that would tick all those boxes, hence why we don't think it's going to become too common," he told a Thomson Reuters/IFR briefing.