Direct Listings Jump. Why This Path to Going Public Is Getting Noticed.

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Spotify had the first direct listing, on April 2018. The company’s banner was hanging from the New York Stock Exchange that morning.

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Spencer Platt / Getty Images

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Direct listings have boomed this year, but are still in the single digits because that path to the public markets is a narrow one—so narrow that most companies will continue to choose IPOs or SPAC mergers, experts point out. Why Baron?

So far this year, 942 companies have gone public — raising $299 billion, figures from DeLogic show. Initial Public Offering and Special Purpose Acquisition Company merger totals are 383 and 559, respectively.

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By comparison, only seven firms have used direct listing — not raising a dime, simply listing their stock on exchanges. Still, seven are more than half of the 13 companies using direct listings since 2018.

“We may be seeking direct listings for more late-stage companies,” said Eddie Molloy, co-head of equity capital markets for Americas at Morgan Stanley. “They will not replace IPOs, but will provide companies with another opportunity for public markets.”

IPO expert Jay Ritter also expects the number of direct listings to rise — unless there’s a setback like an accounting scam that could tarnish the method.

“More and more companies will use direct listings to avoid selling undervalued shares in a traditional IPO or to avoid the dilution caused by the sponsor shares that come with the SPAC merger,” said Ritter, a finance professor at the University of Florida. , who study IPOs.

The first direct listing took place almost four years ago, on April 3, 2018, when Spotify (SPOT) opened for trading on the New York Stock Exchange. The music-streaming service did not raise any money with its offering, but its first day as a public company ended with a valuation of around $27 billion.

Over the next two years, five companies were directly listed: Watford Holdings, a reinsurance firm; messaging app Slack Technologies; Palantir Technologies (PLTR), dATA Analytics Company, Posture: (Asana), which provides project management software; and Thrive Holdings (THRY), a provider of marketing automation software for small businesses.

This year—and there’s a month left—there are seven in total: gaming platform Roblox (RBLX); cryptocurrency exchange Coinbase (COIN); Squarespace (SQSP), website design and hosting firm; Money Transfer Firm Wise; ZipRecruiter (ZIP), Job Marketplace; Amplitude (AMPL), Product Analysis Company; and eyewear start-up Warby Parker (WRBY).

One of the biggest public offerings is expected next year from online payment processor Stripe, which is considering direct listings, Businesshala reported. Stripe did not return a request for comment.

Of the 13 direct listings since 2018, eight chose the NYSE and four settled on the Nasdaq. Wise had listed its shares on the London Stock Exchange in July.


The appeal of a direct listing may not be obvious to the retail investor. After all, like an IPO or a SPAC merger, direct listings require similar paperwork — essentially a prospectus filed with the Securities and Exchange Commission — and roughly the same amount of time, 12 to 18 months, according to David Ethridge, co. Head of IPO Services of PwC. Ethridge said 12 to 18 months includes the time companies need to prepare for life as public entities.

But there are real differences: how the money is raised and where it goes, and the role played by investment banks.

First, money. Companies that opt ​​for an IPO typically require fresh capital and use offerings to sell stock to investors. In a direct listing, shareholders—often the founders, investors who were on the ground floor, and employees—sell their stock and receive the money, not the company.

Two experts—Magdalena Henrik, Bank of America’s co-head of U.S. Technology Equity Capital Markets, and venture capitalist Eric Liaw—suggest that companies that don’t need capital immediately are better suited for direct listing.

“Key Criteria for” [companies] Choosing a direct listing is whether their balance sheet is strong enough that they don’t need to raise money in the offering,” said Liav, a general partner at IVP, a venture-capital firm that has invested in more than 400 companies, including 125 Has invested in publicly traded entities.

Second, investment banks. In an IPO, banks underwrite the sale of shares. They help write the prospectus, set the price for the offering, sell stock to investors through their network the night before the company’s listing, help set up road shows, and help the stock begin trading. Support later.

As a result, underwriting fees are the biggest direct cost in an IPO—an average of 5% to 7% of gross IPO proceeds, Ethridge said.

Several banks typically work on one large IPO and split the fees. For example, Airbnb (ABNB), the home sharing service, raised $3.5 billion with its public offering last December. Three dozen banks led by Morgan Stanley and Goldman Sachs,
worked on the deal.

In direct listing, banks act as financial advisors. Nevertheless, they help in preparing the registration details of the company, and as per the status of the business. A guide to direct listings from the law firm Gibson Dunn. An investment banker who has worked on several deals said they also act as market makers and guide the price.

Their fees are “materially” low, but how little is determined with just a dozen direct listings, Ethridge said.

“I wouldn’t be surprised if the gross spread is 50% of the total fee paid that might otherwise have been paid. [in IPOs],” he said.

Oddly enough, though, banks typically earn as much with direct listings because there’s less work on the deal so the division is bigger, said Richard Truesdale, co-head of global capital markets at Davis Polk, who has worked with Spotify and Watford Direct. Worked on listing. ,

Coinbase is one case. The crypto exchange ended its first day as a public company in March with a market cap of around $86 billion. Its total number of financial advisors was four, including Goldman Sachs and JPMorgan.

“Although the overall comp is quite low, it is not low per bank,” Truesdell said.


The real winners in direct listings could very well be investors – both institutions and regular people.

Direct listings are preferred because many do not have a lockup – investors in an IPO have to wait 90 to 180 days before selling their shares. In direct listing, investors can offload their shares as soon as the company starts trading.

None of the lockups make it easy for the likes of Wellington Management, which manages $1.4 trillion in assets, to create an “out of the shoot” position, said Michael Carmen, a senior managing director at Wellington, which has earned more than 2,000 million dollars. Helping companies go public. Since 2010 – through four direct listings.

More important, direct listings may be better for regular people. In an IPO, institutional investors will buy shares of a company at the offer price the night before its debut. Then, the next day, the stock price will jump as all kinds of investors try to get the shares.

“The retailer drives the pop on the first day,” said Truesdale of Davis Polk. Why Baron?

The result: Stocks for a traditional IPO can often be too expensive for regulars during their first trading day. Consider Airbnb again. Shares closed at $144.71, more than double the $68 IPO price.

“With direct listing, [retail investors] Carmen of Wellington said, “All the other institutions have the same rights.”

Avoiding first-day pops is one reason Amplitude chose direct listings, said co-founder and CEO, Spencer Skates. Amplitude rose just 9.6% from its opening price.

When a company’s stock rises 30% or 50% or 100% at its inception, the IPO was wrong, Skates said. Companies are giving up “a large amount of value for no reason other than a good press headline,” Skates said.

For companies, analyst coverage is important. Analysts have clients. They rate the shares. They give perspective. And direct listings typically don’t generate the same level of analyst coverage as an IPO that a roadshow does.

Most directly listed companies replace road shows with “analyst days” where investors, including regular people, learn about the business. For example, Coinbase hosted Reddit: “Ask us anything.”

But the lack of analyst coverage doesn’t necessarily have to be a deal breaker. “If you’re Spotify you know you’ll get coverage, so you don’t worry about it. People won’t ignore a $30 billion market cap company,” said Carmen of Wellington.

Skates wasn’t surprised that Amplitude had to reach analysts and investors.

“It’s a little more work on the part of companies to make sure all the information is out there,” he said. “You still get analyst coverage.”

Traditional IPOs, Skates said, “get a little bit more investor interest, but that’s because they’re doing massive multi-hundreds.” [million] Free item.

“As a CEO, you don’t want investors looking for a quick flip on a stock. You really want people who are committed to the long term.”

Write to Louisa Beltran at [email protected]


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