The Race for Lead Underwriter Status in Tech IPOs
Goldman Sachs and Morgan Stanley, two of the most prominent investment banks in the tech IPO market, are now competing fiercely to lead upcoming debuts that could generate some of the highest profits in Wall Street history. Goldman Sachs has already secured a significant advantage by being named the “lead left” book runner for the SpaceX offering scheduled for June 12. While both banks will play key roles in the upcoming deals, the bank listed as the lead left on the front page of the S-1 prospectus is expected to receive significantly more rewards than its counterparts.
The stakes are high, as institutional investors such as hedge funds, mutual funds, insurers, and endowments are eager to secure the largest possible share allocations in these mega-IPOs. This trend was evident in the SpaceX deal, where the lead underwriter had considerable influence over how shares were distributed among investors.
Why Lead Underwriter Status Matters
According to Jay Ritter, a renowned expert on IPOs from the University of Florida, the lead underwriter holds a powerful position. They determine how many shares each fund receives, while other underwriters only share in the fees and provide analyst coverage. The lead underwriter's influence extends to the allocation of shares, which can be crucial for institutional investors looking to maximize their returns.
To ensure they receive the best possible share allocations, funds often pay the lead underwriter substantial "soft dollars." These are defined as the amount by which the commissions paid on trades exceed the bank’s cost to execute the transactions. The more soft dollars a fund sends to the lead underwriter, the greater the portion of IPO shares they may receive in return.
Strategic Moves by Institutional Investors
Given the uncertainty around which bank will secure the lead left designation for the upcoming AI-related IPOs, Ritter suggests that institutional investors need to spread their bets by building relationships with both Goldman Sachs and Morgan Stanley. This strategy ensures they remain well-positioned with both firms, regardless of which one ends up leading the deals.
The significance of the lead underwriter role is highlighted by the potential financial rewards. In the SpaceX IPO, the fees for raising an estimated $86 billion would amount to roughly $600 million. However, the real gains come from the stock's "pop" on the opening day of trading. Banks often underprice the stock to create a quick profit for investors, which helps build long-term loyalty. A 20% increase on the first day could result in over $17 billion in gains for investors, with a significant portion flowing back to the banks through soft dollars.
Potential Returns from AI IPOs
The upcoming AI IPOs, including those from OpenAI and Anthropic, are expected to be even larger than the SpaceX offering. Each of these companies is anticipated to raise at least $60 billion, resulting in a total of over $120 billion—40% more than the SpaceX raise. At the same rate of 0.75%, the gross spread would amount to $900 million. However, if the stocks experience a similar 20% pop on the first day, the soft dollar windfall could reach over $7 billion, with the lead left underwriter capturing the majority of this amount.
Odds and Expectations
Kalshi gives Goldman Sachs a 73% chance of securing the lead underwriter role for OpenAI, while PolyMarket places the odds at even for Anthropic. Ritter believes that institutional investors are already deploying soft dollars in advance to boost their standing with both banks. Both Goldman Sachs and Morgan Stanley showed strong performance in sales and trading last year, with Goldman growing 18% to a record $41.5 billion and Morgan Stanley expanding 17% to $33.1 billion.
Future Prospects
Both Anthropic and OpenAI have filed confidential draft registration statements, but the exact timing of their debuts remains unknown. Despite this, Ritter notes that Goldman and Morgan Stanley are already collecting soft dollars based on their chances of leading one or both deals. He expects both firms to see continued success in sales and trading in the coming quarters due to this trend.
For institutional investors, the IPO game is highly lucrative. With two frontrunners for the lead left designation, it is essential to maintain a high-value customer status with both banks to maximize potential returns.
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