Shrinkage!

Goldman's Rise of the IPO Machines

IPOs and the fees that used to flow from them have been drying up.
Photographer: Michael Nagle
GOLDMAN SACHS GROUP INC
-2.21
At Closing, April 20st
251.96 USD

Goldman Sachs is embracing the machines.

The firm that has long cultivated an image of relationship banking and trusted advice -- in reality Goldman was always more of a trading house than rivals Morgan Stanley or boutiques like Lazard -- now says it plans to hand over about half of the IPO process to computers.

Goldman is trying to portray the move as not being driven by pressure on fees or cutting costs. The executive in charge of the effort, George Lee, says Goldman's IPO bots won't replace actual bankers. He says it's really about giving more technology to clients. CEOs get an app to watch their IPO unfold in real time. Goldman's junior bankers get more time to focus on the slightly less grunty work of corporate filings. 

Well Runs Dry

The worldwide IPO market generated just $4.3 billion in fees last year

Source: Thomson Reuters

But it's hard to believe that Goldman's push to automate the process is not a function of the fact that the IPO market and the fees that used to flow from it have been drying up. Last year, the global IPO market generated just $4.3 billion in fees, down from $12 billion in 2007, and more than $8.5 billion just a few years before, according to Thomson Reuters. That's because there are many fewer IPOs than there used to be, especially in the U.S.

Public Erosion

Initial public offerings have been declining worldwide

Source: Thomson Reuters

This could all be cyclical. Tech unicorn start-ups are waiting in the corral, and many of them could be expected to go public. But IPOs typically follow the ups and downs of the market, and stocks have been hot for a while now, with the S&P 500 and Dow at all-time highs, leading some to question whether the IPO market is ever coming back.

Worrying about the de-equitization of America is in vogue lately. Analysts at Credit Suisse detailed the Great Shrink in a recent note, saying there are just more than 3,600 U.S. public companies, about half of what there was two decades ago when the economy was considerably smaller. At his confirmation hearing in March, SEC Chairman Jay Clayton suggested that's going to continue unless we do something about it. Public markets, he said, are less friendly for companies than they used to be.

It's not clear whether this is a problem. My Gadfly colleague Lisa Abramowicz argued after the Clayton hearing that companies still have a number of ways to raise capital, including in private markets or by issuing debt. Goldman's move to automate the IPO process, a culmination of a nearly two-year project to make its banking operations more efficient, suggests that the firm clearly thinks the IPO and equity markets will continue to shrink. 

Long Wait

Goldman Sachs is betting that the IPO market probably won't rebound quickly

Source: Bloomberg

If you were a bank worried about some fee pressure, announcing to the world that you were going to use computers for half the IPO process doesn't seem like a great solution. Reading that will likely prompt CFOs to ask for an even larger fee break. Instead, the automation seems to be a reaction to a bigger change. The smaller business can no long afford the ranks of bankers it once did.

Computers and self-populating spreadsheets don't have to be paid $200,000 a year to sit around and wait for offerings. And it appears Goldman is making the bet that the wait between IPOs isn't going to get shorter anytime soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Stephen Gandel in New York at sgandel2@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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