The present digital investment mania is beginning to make the dotcom boom look like value investing.
Artificial intelligence and Bitcoin are the two most rampant horses of the coming apocalypse.
The horsemen — investment banks — must decide how wildly they dare to ride.
At the end of September, Fermi, a power developer co-founded by Rick Perry, former governor of Texas, raised $785m at a $12.5bn valuation in an IPO on Nasdaq and the London Stock Exchange.
UBS, Cantor Fitzgerald, Evercore and Mizuho were the lead bookrunners.
Fermi plans to build a sprawling power plant and data centre complex for artificial intelligence clients.
At the time of the IPO it had, in the words of its prospectus, “no operating history or historical revenue”.
This did not deter large institutional investors, including infrastructure funds, from buying in.
One banker away from the deal praised it at the time as “America at its finest” — a country still able to raise vast amounts of capital for innovative projects.
By mid-November the stock had fallen about 40%. It is now down nearly 60% after larger than expected losses, a cancelled $150m funding agreement with a prospective tenant and growing scepticism about the scale and viability of AI-linked investments.
Money down
Meanwhile in the cryptoverse, Strategy, one of the best known examples of a 'Bitcoin treasury company', raised €620m in November by selling perpetual preferred stock.
Barclays, Morgan Stanley, Moelis & Co, Société Générale, TD Securities, Canaccord Genuity and StoneX Financial were the bookrunners.
The stock pays a 10% dividend — if the company has enough money. If it skips a dividend, the payments owed to investors accumulate.
Strategy is essentially a listed fund that issues securities and uses the money to buy Bitcoin. Historically its enterprise value has been higher than the value of its Bitcoin holdings, but as the Financial Times has reported, the premium has tumbled from about 2.2 times in April to only 1.16 early this month.
If Strategy is not worth much more than its Bitcoin stash, that implies the market thinks buying its securities does not offer much advantage over buying naked Bitcoin or an exchange-traded fund holding the coins.
When Strategy issued those preferred shares to euro investors, the market cap of its common stock was about $70bn — down from a peak of $127bn in July. It is now worth $47bn.
Take a chance on me
Fermi and Strategy may turn out to be great investments which reward their bold backers handsomely.
But this kind of speculative investment clearly carries high risks.
How carefully do investment banks consider these when deciding whether to underwrite a deal?
It is not clear. But the present craze for investing in anything connected with AI or cryptocurrencies is likely to provide at least partial answers to another question — how much reputational risk does a bank actually face if brings a dud to market?
The AI and crypto faithful will argue that every previous technological revolution, from railways to electrification, involved a number of individual failures, on the way to a transformative, sector-wide success. Some of the failures were outright frauds.
While the jury is still out on whether the 21st century's technological alchemies will match their backers’ lofty promises, investment bankers must decide today what part they will play in financing the most speculative tail of the AI and crypto beasts.
Ambitious up and coming banks may decide to be more aggressive, but the overall tone will be set by the largest US firms.
None of them was on the Fermi deal, although that does not mean they passed on it.
Next year, a string of high risk, high reward deals is likely to come to market, led by Elon Musk's SpaceX, which has plans to put data centres in space.
Banks will be sorely tempted to swallow any doubts and go for the big prizes.
History suggests a bank with a big reputation can shake off a few dents without much trouble.
In March 2014 Carnegie and Morgan Stanley led the $576m-equivalent IPO of OW Bunker, then the world's largest shipping fuel supplier. Eight months later the Danish company went bust, amid claims of fraud.
The episode has hardly stopped either investment bank remaining a leader in Europe's IPO market.
A single failed deal is unlikely to do lasting harm to a bank’s aura. But if it repeatedly sells empty promises, investors are bound to lose trust.
Banks can gamble with their own respectability if they want. But that is not all they are risking.
The equity capital market itself relies on trust and confidence. The appetite of investors, especially in Europe, is fickle and fragile.
It only takes a few IPOs that trade down sharply — not even disasters or bankruptcies — to kill sentiment for half a year.
For the sake of the market's health, investment banks should be careful which saddles they leap into.