What Do Investment Banks Make on an IPO?

With an expected pickup in technology IPOs to come in 2025, it is worth understanding the IPO underwriting syndicate and what bookrunners make in a transaction. As an example, we take the ServiceTitan IPO which launched last week. A quick study of the prospectus cover helps identify the bookrunners and their roles on the deal. First we see the lead bookrunners across the first line with the prized 'lead left' position held by Goldman Sachs on this transaction. Typically, we see bulge bracket banks in the lead position followed by boutique and regional firms.

To understand how much each bank is making on the deal, we note the gross proceeds raised, $624.8 million in this case, and the net proceeds raised, $590.4 million. The difference between these amounts is the underwriting discount which we see is footnoted and explained further in the "Underwriting" section. When we divide the underwriting discount by the gross proceeds, we calculate a 'gross spread' of 5.5%. IPOs can have a gross spread as high as 7% ranging to low-single digit percentages for very large offerings.

In the prospectus's Underwriting section, we see the transaction economics for each bank. In this case, both Goldman Sachs and Morgan Stanley are receiving the same fees as co-leads. However, in its lead left position, Goldman Sachs also serves as stabilization agent for the transaction (which is a topic for another post). GS and MS both have 28.8% economics so how much does each make?

To calculate their fees, we simply multiply the gross proceeds by the gross spread by the banks' economics ($624.8 million x 5.5% x 28.8%) which equals a $9.9 million fee each for the two leads. This is quite a nice outcome for both, roughly equal to selling a $600-700 million business in an M&A transaction (taking the $9.9 million fee and dividing by an illustrative 1.5% fee for selling a company).

For the smallest players involved, Academy and Loop, the same calculation results in only $78,000 each. These firms are clearly smaller so have less overhead than GS/MS and they also do less work marketing the deal, which somewhat justifies the lower fee. However, these firms often pick up research coverage and still must compensate their bankers so they have to participate in many more deals in a smaller role to compensate for their lower economics.

There are several other fee levers for the lead banks in an IPO. First, IPOs have a greenshoe where the underwriters can choose to sell 15% more shares if they believe the market will bear the additional shares. By exercising the greenshoe, GS and MS would receive $11.4 million in total fees. Then there is the opportunity for follow-on equity transactions for the issuing company. In the base IPO excluding the greenshoe, ServiceTitan is selling 8,800,000 shares. The company has more than 79 million basic shares outstanding (and more if options and RSUs are included). This means that the underwriters have only sold ~10% of ServiceTitan's total market capitalization and can help existing shareholders sell their stakes after the shareholder lock-up expires (typically 90 or 180 days) and also help the issuer raise additional primary proceeds. These transactions are typically larger than the IPO but generally have a lower gross spread resulting in a similar or larger fee than the IPO. Clearly, the lead underwriter roles are highly coveted by the leading investment banks for good reason!