Goldman Sachs’ $220M Shein Play: Why They Bought After the IPO Flop

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The highly anticipated, yet ultimately tumultuous, public market debut of fast-fashion titan Shein last month has provided a potent illustration of shifting investor sentiment and the critical, albeit often unheralded, role of investment banks in managing the volatile landscape of initial public offerings (IPOs).

Goldman Sachs, one of the lead underwriters for Shein’s $26bn IPO, stepped into the breach, acquiring shares worth approximately $220mn in the immediate aftermath of the online retailer’s rocky stock market debut. This intervention, a standard but crucial part of the underwriting process, aimed to provide a much-needed stabilising hand as the stock buckled under selling pressure.

The Wall Street behemoth purchased 42mn shares, representing 13 per cent of Shein’s initial share float, leveraging its capacity as an underwriter to buy shares in the open market to “stabilise” a stock that was conspicuously shunned by a significant portion of the investment community. This mechanism, colloquially known as the “greenshoe” or overallotment option, allows underwriters to manage supply and demand dynamics immediately post-listing.

According to a filing with the Hong Kong Stock Exchange, Goldman Sachs acquired these shares at prices ranging from HK$35.90 to the listing price of HK$48.56. With an estimated average purchase price of HK$42.23, Goldman’s strategic buying generated a reported trading profit of about $34mn. This profit arises from selling more shares than initially allocated to investors at the IPO price and then covering that “short” position by buying shares back at a lower price in the open market, thereby simultaneously supporting the stock and generating a return.

Shein’s long-awaited listing, initially priced at $26bn, was quickly labelled a “disaster” by market analysts after shares plunged as much as 10 per cent on the first day of trading. The stock has since continued its downward trajectory, plummeting 38 per cent from its IPO price and slashing the company’s market capitalisation to a mere $16.3bn – a stark reminder of the unforgiving nature of public markets compared to the often-generous private funding rounds.

The mechanics behind such stabilisation efforts are fundamental to IPO market functioning. Underwriting banks initially sell more stock at the issue price than they are contractually given by the issuing company. They then possess two primary options to cover this “short” position: either by exercising an option to issue more shares directly from the company — known as the overallotment option — or, critically, by buying them back on the open market if the price falls below the listing price. The latter not only covers their position but also provides crucial buying support, helping to prop up the share price by increasing demand during a vulnerable period.

This intricate ballet of supply and demand management, governed by agreements such as those set out by the International Capital Markets Association (ICMA), stipulates that any profits generated from such stabilisation activities are typically shared among the consortium of banks responsible for underwriting the IPO. This collective responsibility underscores the shared risk and reward inherent in bringing a company to market.

Goldman Sachs, adhering to industry protocol, declined to comment on the specifics of its greenshoe execution.

It is worth noting that the allocation of stabilisation profits can vary. In some high-profile cases, such as the disappointing London listing of food delivery giant Deliveroo in 2021, the underwriting banks proactively agreed in advance to surrender any stabilisation trading profits back to the company. This gesture can be a means of mitigating reputational damage or demonstrating a commitment to the issuer’s long-term health, particularly when an IPO performs poorly.

Shein’s current financial footing further complicates its market narrative. The company reported cash and cash equivalents of $15bn on its balance sheet as of June 30, according to its latest results. This figure is just $1.3bn shy of its current market capitalisation, a peculiar position that raises questions about the market’s valuation of its core business operations and future growth prospects relative to its cash hoard.

The precipitous drop in Shein’s IPO value represents a dramatic fall from its peak private valuation. During the pandemic lockdowns, the company became a sensation among young consumers, driven by its ultra-affordable fashion, rapid production cycles, and aggressive social media marketing campaigns, particularly “Shein hauls.” This phenomenon propelled the company to a staggering valuation of about $100bn following a 2022 private fundraising round. The chasm between that private valuation and its current public market cap underscores a significant re-rating of growth stocks, particularly those in competitive, capital-intensive sectors facing increasing scrutiny over environmental, social, and governance (ESG) practices.

The broader market context for Shein’s struggle includes a general cooling of the IPO market for technology and e-commerce firms, investor fatigue with unprofitable growth narratives, and heightened geopolitical tensions impacting supply chains and consumer sentiment. Companies once lauded for hyper-growth are now being pressed for clear paths to profitability and sustainable business models, a challenge Shein, with its complex global supply chain and reliance on a high-volume, low-margin model, must now squarely address in the public spotlight.