The investment banking (IB) sector is experiencing a severe drought of deals, leading to fierce competition among securities firms to secure underwriting rights. In a striking development, some issuers are now requiring securities firms to invest in their companies as a condition for being selected as lead underwriters.
According to industry sources, the power dynamics in the selection process for underwriting initial public offerings (IPOs) by small and mid-sized private companies have shifted significantly in favor of issuers.
Despite securities firms expanding their IB divisions and increasing the number of IPO-focused houses, the prolonged high-interest rates, coupled with stricter listing review standards from exchanges and heightened market scrutiny on valuations, have led to a substantial decline in the number of viable IPOs.
The problem is that this heated competition has resulted in excessive demands from issuers. Recently, some private companies have proposed unprecedented conditions, stating, "We will only grant lead underwriter status to the securities firm that invests in our pre-IPO funding round." A semiconductor and electronic components-related private company, referred to as Company A, has made direct investment (PI) a mandatory requirement during its lead underwriter selection process.
In response, existing underwriters and large securities firms that submitted proposals are reportedly struggling to secure the deal while expressing reluctance to meet these investment conditions.
A representative from a securities firm that participated in Company A's presentation stated, "In a situation where the outcome of the preliminary listing review is uncertain, executing a stake investment worth hundreds of millions of won to obtain underwriting rights poses too great a risk. However, if we do not accept these conditions, we risk losing the deal altogether, forcing us to present the matter to our investment review committee with reluctance."
Experts warn that this practice of selecting underwriters based on investment conditions could undermine the risk management frameworks of securities firms. The potential losses from equity investments may outweigh the underwriting fees, creating a situation where the costs exceed the benefits.
Concerns have also been raised about the potential breakdown of the tension between underwriters and issuers. A securities firm that has invested in an issuer may face conflicts of interest, prioritizing the recovery of their investment over objectively assessing the issuer's valuation, which could lead to inflated public offering prices.
A financial industry insider noted, "If underwriters, who are supposed to conduct fair valuations and due diligence, become beholden to issuers due to equity investments, it could result in inflated public offering prices and inadequate listing verification, ultimately harming retail investors who enter the market after the IPO."
* This article has been translated by AI.
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