Summary List Placement
A late-year boom in initial public offerings has meant a burst of activity for already-busy capital markets lawyers at prominent law firms like Cooley, Latham & Watkins, and Simpson Thacher & Bartlett.
After a dropoff due to the coronavirus pandemic, the IPO market bounced back by mid-summer, with companies like Zoominfo, Lemonade, and Rackspace Technologies going public. The surge has created mountains of work — and hundreds of millions of dollars in revenue — for the law firms that represent companies going public and their underwriters.
Law firms’ big clients, especially in sectors like hospitality and airlines, spent months this spring in crisis mode and focusing on survival instead of growth. Companies turned to debt markets to sell an unprecedented volume of junk bonds, beating 2012’s record and hitting $330 billion by September, according to Bloomberg.
But Richard Fenyes, a partner at Simpson, said a healthy round of IPOs this summer, including Zoominfo and Warner Music Group, paved the way for increased activity this fall and blockbuster public offerings in recent weeks like Airbnb and DoorDash.
“From there, the floodgates just sort of opened,” said Fenyes, who represented Zoominfo.
Read more: A Goldman Sachs banker who leads a team that helped clients like Delta and Norwegian Cruise Line raise $120 billion in debt to weather the pandemic shares his 2021 outlook for the travel industry
A tech-fueled boom
Law firms like Cooley, Goodwin Procter, and Wilson Sonsini Goodrich & Rosati have deep roots in new-economy hubs like Silicon Valley and Boston and have done brisk business with many health-care and technology companies, like AbCellera and Upstart Holdings, going public. Wall Street stalwarts like Davis Polk & Wardwell, Skadden Arps Slate Meagher & Flom, and Kirkland & Ellis have also been busy with IPO work.
Airbnb and DoorDash, which budgeted a combined $6.5 million in legal fees in deals that listed Latham, Simpson Thacher, Wilson Sonsini, and Goodwin as counsel, have been emblematic of the crush of work that has flowed to elite law firms late in the year.
Of the $76.4 billion raised in IPOs tracked by Renaissance Capital this year, just over half — $38.6 billion — has flowed in since Sept. 1. That’s far higher than the average share of funds raised late in the year: from 2016 to 2019, an average of just 26% of the year’s IPO proceeds was raised from September to December.
The total IPO market, including special-purpose acquisition companies and other listings not tracked by Renaissance, has closed nearly 430 deals, the most since 2000, with $160 billion raised, according to Dealogic.
“This has to be the busiest December that I can remember in the last 20 years,” Dave Peinsipp, a leader of the capital-markets group at Cooley, told Business Insider last week.
While law firm financials aren’t public, the capital-markets boom has helped some firms pay extraordinary bonuses to their associates. Davis Polk told associates in September that it would pay them an extra $7,500 to $40,000, depending on their seniority. A long list of firms have since followed suit.
Some firms have also profited when their clients have gone public because they took a small equity stake early on. And IPOs that made fewer headlines also generated high fees for law firms; AI software company C3.ai spent $2.4 million on its IPO lawyers, and ContextLogic Inc, which runs the e-commerce platform Wish and has filed to go public, has budgeted $1.6 million for legal fees.
Life sciences has done better than most industries, providing a boon to law firms laser-focused on the space
One major source of work has been IPOs from life-sciences and biotech companies.
In December alone, gene-therapy company 4D Molecular Therapeutics, represented by Latham & Watkins, put its IPO legal fees at $1.9 million; Inhibikase Therapeutics, developing treatments for Parkinson’s Disease, represented by Troutman Pepper Hamilton Sanders, set aside $1.9 million for lawyers; and AbCellera Biologics Inc., a Canadian biotech company working with Goodwin and Blake Cassels & Graydon that helps develop antibody-based therapies, put its fees at $4.5 million.
Those numbers are according to the companies’ IPO paperwork, and the final number the law firms see could look different.
“A lot of biotech companies are less susceptible to trends in the economy than other sectors,” said Yasin Keshvargar, a partner at Davis Polk who said such work has kept him busy all year. “A clinical trial development is very expensive, and it takes a lot of cash.”
Early investors in biotech companies that have gone public have seen eye-popping gains. CureVac, a German biotech company working on a COVID-19 vaccine that raised $213 million in its August offering with help from Davis Polk, trades around $120, far higher than its $16 IPO price. Wilson Sonsini client ALX Oncology currently trades at more than double its IPO price.
Mitchell Bloom, who co-heads Goodwin’s life sciences practice, also said capital-markets work has kept his team consistently busy this year, even in the spring as other industries pulled back on public-offering plans. The firm in November advised therapeutics development company Galecto on its $85 million IPO and recently represented underwriters in SQZ Biotechnology’s $81 million public offering and Opthea’s $128.2 million public offering.
Bloom said his initial worries this spring about a slowdown of work were disproven and that there continues to be “plenty of capital” to fund the biotech industry.
“We would have been concerned if the deals in progress were slowing down, renegotiated or stopping, but that wasn’t happening. Things were still moving forward and new deals are getting planned,” he said.
Blockbuster tech IPOs have dominated headlines, but public offerings of all sizes have driven business for law firms
Not all IPOs are million-dollar engagements for law firms, and capital-markets lawyers have had plenty of work outside of the IPO context. Firms have seen a high volume of work from companies that have issued an unprecedented volume of new debt and follow-on equity issuance, even after the first few months of the pandemic.
Fenyes said that his team at Simpson Thather was focused on a broad array of engagements, including working with clients who want to optimize their capital structures. The firm is also keeping busy with a diversity of underwriter and issuer-side work, he said.
At Goodwin, Bloom said his team continues to see a high volume of capital markets work from life-sciences clients, and by working closely with the firm’s capital markets team, they’ve been able to complete smaller projects in addition to high-valuation public offerings.
“The firm does them all, big and small, and I’m proud of that,” he said.
Law firms like Kirkland, Ellenoff Grossman & Schole, and White & Case have seen a surge in work from the special-purpose acquisition company boom.
Special purpose acquisition companies generally list legal fees of $200,000 to $300,000 when it comes to going public. And the de-SPAC process, through which a SPAC takes a privately held company public, generates more work, involving not just capital-markets lawyers, but mergers and acquisitions specialists and other lawyers who advise on areas like taxes, employee benefits and regulatory risks.
Companies that are already publicly traded have also continued to raise capital, creating work for their lawyers. Tech giants including Apple, Gilead Sciences and Uber have raised billions from bond sales in the third and fourth quarter of 2020.
Issuances of new stock by already-public companies has also been robust. Tesla said earlier this year that it would issue $5 billion in new stock in the coming years.
The work may slow down, but some changes in firm work culture will likely stick
Capital markets lawyers interviewed for this piece said their pipelines of work will probably keep them busy until 2021, but investor enthusiasm for newly public companies has some observers worried.
The Wall Street Journal reported over the weekend that leaders at Affirm, which helps retailers offer installment purchasing plans, and video-games company Roblox decided to delay their IPOs, with Roblox’s decision, at least, coming down to price dynamics and concerns about big first-day pops.
Skadden, which is representing Affirm; Davis Polk, which is representing Affirm’s underwriters; Wilson Sonsini, which is representing Roblox; and Simpson Thather, which is representing Roblox’s underwriters, did not respond to a request for comment about the WSJ reports.
John Coffee, a professor at Columbia Law School and an expert on capital markets, said that IPOs have always been highly volatile and that it only takes one failure to get people nervous again. Coupled with the uncertain economic climate, he’s not sure how long this current IPO boom will last.
“How can the pandemic be so bad, with unemployment so high and all of these things are getting worse, yet the IPO market goes up and up? That’s a mystery,” he said.
Whatever happens, some changes to the process of going public are probably here to stay, lawyers said. Keshvargar, of Davis Polk, noted that turning roadshows from a two-week affair to a mostly virtual process that stretches over three or four days has reduced the risk that market complications can arise and derail an IPO.
More companies have also been using the opportunity to “test the waters” with potential investors before making their registration statements public, he added. The Securities and Exchange Commission expanded the universe of companies that could engage in conversations with potential investors with a rule change in September 2019.
Peinsipp, at Cooley, said that the lack of in-person meetings and commutes has given his team’s 200-plus lawyers more time to work. They have helped companies including Unity Software, Corsair Gaming, and C3.ai go public. But he said he finds himself “worried” about his team’s hyper-productivity.
“We have to find a way to get people out of their houses and away from their computers so they can have some semblance of a life right now,” he said. “I want the margins to go the other direction a little bit.”