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Windfall IPO profits set record not seen since dot-com bubble

When is making billions of dollars easier than falling off a log? The answer: When giant Wall Street firms like BlackRock and Fidelity get allocated large chunks of stock in white-hot companies. The following day those shares end up being worth vastly more than the investors paid for them.

Why it matters: More money has been made this way in 2020 than in any prior year, even including the height of the dot-com bubble in 2000.

  • Major companies are postponing their IPOs as a result, worried that they'd effectively be giving billions of dollars away to undeserving investors.

Data: Dealogic; Chart: Danielle Alberti/Axios

By the numbers: According to an analysis by Dealogic for Axios, IPO investors have made more than $50 billion so far this year, just by being allocated stocks and holding on to them for a single day.

  • That's a new annual record, and the year's not over yet.

How it works: Most companies go public in a two-stage process. First they sell stock to investors at a pre-set price. The following day, those investors start trading that stock on the open market, usually at a premium to what they paid initially.

  • Individual investors with accounts at Robinhood or E-Trade have no ability to buy stock at the IPO price. If they want to buy the stock, they have to pay the higher open-market price.

The winners: On Wednesday night, Airbnb sold 51,323,531 shares at $68 each to some of the biggest and most powerful investors in the world. The total amount paid for those shares: $3.5 billion.

  • By the close of trade on Thursday, those shares were worth $7.4 billion, representing an overnight profit of $3.9 billion for institutional investors.
  • Repeat that story across almost 200 other IPOs this year, and windfall profits end up totaling $51 billion. That's a larger profit than is made by any company in America, except for Berkshire Hathaway and Apple.

The losers: What looks like "windfall profits" to investors often looks like "money left on the table" to the companies that actually sold the shares. After all, why should Airbnb sell shares for $68 on Wednesday when it could sell them for $144 on Thursday?

  • Two multi-billion-dollar companies — Roblox and Affirm — have already decided to push back their IPOs as a result.
  • While there is much talk of mechanisms that would allow companies to sell shares at the market price, so far that hasn't happened. The biggest opponents of such structures are, unsurprisingly, the large investors who benefit from the current setup.

The bottom line: The stock market isn't a level playing field — certainly not when it comes to IPOs.

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