IPO bonanza's mood music curiously muted

Based on the recent flurry of planned initial public offerings being announced in London, investment bankers should be enjoying a bonanza of new business.

However while their equity capital markets colleagues are certainly busier than they have been for a while, the mood remains cautious among most UK investment bankers.

One reason why bankers are not popping the champagne corks in celebration quite yet is that the market for IPO advisers and bookrunners is very competitive.

"There is more activity which is great news for the UK, and it is nice business to have, but it is becoming more transactional and commoditised," says the UK head of a large investment bank. "The fees are tight and there are more banks in each syndicate so the fees are spread further."

Another top European investment banker based in London says: "I don't think the year has started very well for anyone. I don't see where everyone is seeing all this IPO volume - we're not seeing it."

Last year brought a sharp rebound in the UK IPO market. In total, 47 companies made their stock market debut on London markets in 2013, raising $12.6bn in the process - by far the most for any year since the financial crisis, according to Thomson Reuters.

But in many cases, the competition was so intense between the banks competing for business after several years of slim pickings that their fees were squeezed.

Last year, investment banks earned $268.6m of fees on IPOs in the UK, up from $110m the previous year, according to Thomson Reuters.

But fees as a percentage of the value of IPOs were down from 2.26 per cent in 2012 to 2.06 per cent last year. That was much less than the global average for IPO fees of 2.86 per cent last year.

Goldman Sachs and UBS, which worked on the UK government's sale of a stake in Royal Mail last year, were paid fees of less than 1 per cent on the transaction - much less than the 1.5 to 2.5 per cent fees typically earned on similar-sized deals in Europe.

Although it was not an IPO, Bank of America Merrill Lynch, JPMorgan and UBS all waived their fees entirely and even returned a quarter of their sales commissions on the government's sale of a £3.2bn stake in Lloyds Banking Group.

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Last year, the bulge-bracket banks dominated the UK's equity capital market. Barclays, BofA and Goldman worked on more than a third of all IPOs by value, raising a total of more than $4.6bn for their clients. To date this year, there have been two IPOs in the UK, raising only $36.4m.

Many of the IPOs that have been announced or are expected this year are of companies owned by private equity. One banker says that to win a mandate as bookrunner on one of these IPOs they often need to provide financing to the business several months before at such low rates that "it is almost a loss-leader".

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