In the race to win a coveted role on the next mega US IPO and manage the ensuing riches, Wall Street’s wealth advisers are ramping up lending to founders and entrepreneurs based on the soaring values of their private companies.
Loans to clients with difficult-to-tap paper riches are surging, according to interviews with bankers, lawyers and wealth managers. At Goldman Sachs Group Inc. private wealth management in San Francisco, loan balances are up 50% since 2023, while at JPMorgan Chase & Co., lending demand at the private bank globally has surged tenfold in recent months.
The unparalleled wealth-creation tied to artificial intelligence, particularly in Silicon Valley, is spurring entrepreneurs to seek ways to extract cash before they can, or want to, sell stock. For the banks, the prospect of an IPO in the not-so-distant future makes lending to these clients more appetizing while offering a sweetener that can help win them a top underwriting spot — as well as a broader wealth management role — once the company goes public.
“The founders that we’re seeing are very young,” said Solenn Seguillon, head of the technology practice at JPMorgan’s private bank in San Francisco. “The cycle is so much shorter and you have to move very quickly. You have to start building this relationship right away. You have to find ways to add value right away.”
Just look at Morgan Stanley, one of the lead banks that took SpaceX public in June. The firm hauled in more than $70 billion of net new assets from IPOs at its wealth-management business in the second quarter, with a large portion tied to the SpaceX offering, Bloomberg has reported. The bank has sought to cater to early-stage companies to line up the potential for a longer relationship, counting 70 of the top 100 unicorns as clients, executives have said.
Overall lending at Wall Street banks’ wealth management arms is up, according to recent earnings reports, from relatively safe loans backed by portfolios of liquid stocks to riskier, unsecured lending.
And while still relatively uncommon, the boom in privately-held wealth among a wider range of employees is leading banks to boost their offerings of loans collateralized by illiquid, pre-IPO stock. Unsecured and share-pledge loans lead recent lending growth, according to Goldman Sachs’s private bank.
“It’s skyrocketing,” Laura Uberoi, head of private wealth finance at law firm Addleshaw Goddard LLP in London, said of the increase in pre-IPO stock-backed lending, and whose job is to ensure the underlying shares can actually be pledged as collateral. “I have doubled the number of deals globally from December to now than I had for the entirety of last year,” she said.
Uberoi reports seeing a broader range of these types of loans across Wall Street, with smaller deals as low as $150 million increasingly common. It’s a signal private banks are becoming more comfortable lending beyond the founder-level to others who’ve also seen their stakes soar in value.
“You have people who resemble a founder or early employee who are actually employee number 250 because these companies are so big and their wealth is so material,” said Garret Spiecker, a senior managing director at Citizens Financial Group Inc.’s private bank, which has a private stock lending program. “As a function of that, banks wants to work with these individuals.”
Not many companies allow share pledging, and historically, Wall Street banks have been highly selective in making such loans. They last gained notoriety in 2019 after WeWork founder Adam Neumann needed help repaying a $500 million credit facility from banks including JPMorgan that was pledged against the value of his pre-IPO stock before it cratered.
Still, banks today are seemingly more willing to take on risk despite lingering questions about the winners and losers of the AI race. Any sharp decline in a startup’s valuation or IPO prospects can quickly impact the value of collateral, increasing the risk to both lenders and founders.
In part, Wall Street is now filling the shoes of some regional banks that collapsed in 2023 that had catered heavily to startups. JPMorgan acquired First Republic Bank’s assets including its start-up banking group, while HSBC Holdings Plc took on hundreds of bankers after buying the UK unit of Silicon Valley Bank.
A lot of the riskier types of lending today “is issuer-specific” rather than to the extent done by those now-defunct banks, said Steve Edwards, a managing director at Morgan Stanley Wealth Management. The focus in particular is on employees from companies planning to IPO within three years, he said.
Brittany Boals Moeller, head of the San Francisco region at Goldman Sachs’s private bank, uses a select list of target companies from the investment bank and Goldman’s investing groups to help find new candidates for pre-IPO lending, seeking to make use of the house view on the underlying dynamics.
JPMorgan is also increasingly comfortable extending short-term, unsecured loans to such individuals because of the opportunity for future liquidity events such as an IPO or company-sponsored tender, Seguillon said. They are recourse loans, meaning the borrower can be pursued for repayment, and typically come due between 12 and 18 months.
The market for secondary share sales, which has flourished in recent years, has also made banks more comfortable with pre-IPO lending as privately-held stock can be now be more easily sold to repay debt.
But the appeal of a so-called recourse loan from a bank isn’t universal, and other financing firms have emerged, sometimes offering more creative structures for liquidity.
Travis Kell, who co-founded AI startup Metropolis Technologies, says when he sought financing in 2022 to help buy a house in California he turned down proposals from banks including Silicon Valley Bank because they required him to pledge a substantial amount of his privately-held stock for a relatively small amount of cash, repayable after just two years.
Instead, he struck a deal with specialized investment firm Ion Pacific to gain cash upfront in exchange for a share of the profits on some of his stock several years into the future, when ideally they’d be worth much more. He isn’t personally liable if the stock ends up being worth less than the amount due.
“Not ever feeling pressure or urgency to have to sell the shares in uncertain environments, and then the alignment that the profit share creates, we thought that was a really good structure,” Kell said in an interview. “Other conversations were basically, ‘How am I going to get paid back?’”
Liquidity demands aren’t limited to employees in tech as all kinds of companies remain private for longer. Housing is the top reason they’re seeking cash — particularly as prices in the Bay Area skyrocket — as well as exercising options, estate planning and paying taxes, bankers say. A loan may function as a bridge to the next tender offer, while for others it allows for liquidity without having to take any chips off the table — or suffer the tax consequences from doing so.
The AI race has lit a fire under the IPO market, with listings this year raising about $230 billion, excluding blank-check firms and other financial vehicles, according to data compiled by Bloomberg. That’s the most since 2021, the data show. Anthropic PBC — most recently valued at $965 billion — could come to market as soon as October, while rival OpenAI has also confidentially filed for a public listing.
The $75 billion SpaceX IPO in June minted new millionaires and billionaires among its workers. As the lead banks on the deal, Goldman Sachs and Morgan Stanley notched roughly $100 million of fees each. That’s expected to be even more lucrative over the long term too: Morgan Stanley is poised to generate more than that amount in revenue each year from managing the newfound SpaceX wealth.
So banks are doubling down their efforts. Goldman, which has spent years strengthening its ties to the startup community, earlier this year bought venture capital firm Industry Ventures. Its founder has said the firm is exposed to about a fifth of the US venture capital space through underlying holdings and partnerships.
At Goldman’s San Francisco office, the number of wealth solutions professionals has nearly tripled over about the past four years. The office just saw the largest first-quarter inflow of private wealth management assets in its history.
And JPMorgan plans to double its private banking headcount in San Francisco over the next five years to more than 200 people to keep pace with the rapid growth in wealth there. It’s also expanding and renovating local offices, and opening new financial centers.
“We’ve seen wealth creation in the Bay Area before with previous tech booms, but this is different in the speed with which it’s happening,” said Seguillon. “There’s a $10 billion valuation on a weekly basis.”
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