Skip direct announcements. Why this path to the public is noticed.

Direct listings have jumped this year, but are still single digits as this path to public markets is narrow, so narrow that most companies will continue to choose IPOs or PSPC mergers, experts say. that of Barron.

So far this year, 942 companies have gone public, raising $ 299 billion, according to Dealogic figures. The totals for IPOs and ad hoc acquisition company mergers are 383 and 559, respectively.

By comparison, only seven companies used a direct listing, which didn’t raise a dime, just listing their shares on the stock exchange. However, the seven are more than half of the 13 companies to use a direct quotation since 2018.

“We may see more late stage companies looking to do direct listings,” said Eddie Molloy, co-head of equity capital markets for the Americas at Morgan Stanley. “They will not replace IPOs, but rather provide companies with another route to public markets.”

IPO expert Jay Ritter also expects the number of direct listings to increase, as long as there are no explosions like an accounting scandal that could mar the method.

“More and more companies will use direct listings to avoid selling undervalued stocks during a traditional IPO or to avoid the dilution due to sponsor actions that accompany a PSPC merger,” said Ritter, professor of finance at the University of Florida who studies IPOs.

The first direct listing took place almost four years ago, on April 3, 2018, when


Spotify
(ticker: SPOT) open for trading on the New York Stock Exchange. The music streaming service didn’t raise any money with its offering, but ended its first day as a public company with a valuation of nearly $ 27 billion.

Over the next two years, five publicly traded companies: Watford Holdings, the reinsurance company; the Slack Technologies messaging application; Palantir Technologies (PLTR), the data analytics company; Asana (ASAN), which offers project management software; and


Thryv Holdings
(THRY), a provider of marketing automation software for small businesses.

This year, and one month from the end, the total is seven:


Roblox
(RBLX), the gaming platform; cryptocurrency exchange


Coinbase
(PIECE OF MONEY);


Square space
(SQSP), the website design and hosting firm; money transfer company


Wise
(WISE.London);


ZipRecruiter
(ZIP), the job market;


Amplitude
(AMPL), the product analysis company; and eyewear start-up


Warby parker
(WRBY).

One of the biggest public offerings is expected to come next year from Stripe, the online payment processor, which is considering direct entry, Bloomberg reported. Stripe did not return requests for comment.

Of the 13 direct listings since 2018, eight have chosen the NYSE and four have settled on the Nasdaq. Wise listed its shares on the


London Stock Exchange
in July.

The mecanic

The appeal of a direct listing may not be obvious to the retail investor. After all, like an IPO or a PSPC merger, a direct listing requires the same paperwork – essentially a prospectus filed with the Securities and Exchange Commission – and roughly the same amount of time, from 12 to 18 months, according to David Ethridge, co-head of PwC’s IPO services. The 12 to 18 months include the time businesses need to prepare for life as public entities, Ethridge said.

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

First, the money. Companies that go for an IPO typically need fresh capital and use the offer to sell shares to investors. In a direct listing, the shareholders – most often the founders, the investors who were downstairs, and the employees – sell their shares and they get the money, not the company.

Two experts, Magdalena Heinrich, co-head of US technology capital markets at Bank of America and Eric Liaw, the venture capitalist, point out that companies that don’t need capital immediately are better suited for a direct listing.

“The key criteria of [companies] choosing a direct listing is whether their balance sheet is strong enough that they don’t need to raise funds in the offering, ”said Liaw, general partner at IVP, a venture capital firm that invested in more than 400 companies, including 125 listed entities.

Second, investment banks. In an IPO, banks guarantee the sale of shares. They help write the prospectus, set the offer price, sell the shares to investors through their network the day before the company is listed, organize the tour and provide support once the stock is sold. begins to be negotiated.

Therefore, the sales charge is the largest direct cost of an IPO, averaging 5-7% of the gross IPO proceeds, Ethridge said.

Several banks usually work on a large IPO and divide the fees. For example,


Airbnb
(ABNB), the home-sharing service, raised $ 3.5 billion last December with its public offering. Three dozen banks, run by Morgan Stanley and


Goldman Sachs,
worked on the case.

In a direct quote, the banks act as financial advisers. Still, they help prepare the business registration statement and position the business, according to a guide to direct listings from the law firm Gibson Dunn. They also act as market makers and guide the price, said an investment banker who has worked on several transactions.

Their fees are “materially” lower, but it’s hard to determine how much lower they are with just a dozen direct listings, Ethridge said.

“It wouldn’t surprise me if the total fee paid for the gross spread is 50% of what might otherwise be paid. [in IPOs],” he said.

Oddly, though, banks typically earn as much with a direct quote because less work on a deal, so the split is bigger, said Richard Truesdell, co-head of global capital markets at Davis Polk, who worked on Spotify and Watford direct quotes. .

Coinbase is one example. The crypto exchange ended its first day as a public company in March with a market cap of nearly $ 86 billion. There were four financial advisers, including Goldman Sachs and JP Morgan.

“Even though the total makeup is significantly less, it’s not less per bank,” Truesdell said.

Investors

The real winners of a direct listing could very well be investors, both institutions and ordinary people.

Institutions like straight quotes because many don’t have a lock-up – the 90 to 180 days that investors in an IPO have to wait before they can sell their shares. In a direct listing, investors can unload their shares as soon as the company starts trading.

No blocking allows companies like Wellington Management, which manages $ 1.4 trillion in assets, to create jobs “right on the shoot,” said Michael Carmen, senior managing director of Wellington, which helped bring in more. 2,000 companies on the stock market. since 2010 — four through direct registrations.

More importantly, direct ads can be better for regular people. In an IPO, institutional investors will buy shares of a company at the bid price the day before the launch. Then the next day the share price will go up as all kinds of investors try to get shares.

“Retail is driving pop on day one,” said Truesdell, of Davis Polk. that of Barron.

The result: Stock for a traditional IPO can often become too expensive for ordinary people on its first day of trading. Think about Airbnb again. The shares more than doubled from the IPO price of $ 68, closing at $ 144.71.

“With a direct registration, [retail investors] all have the same rights as other institutions, ”said Carmen from Wellington.

Avoiding day one pop is one of the reasons Amplitude chose a direct roster, said Spenser Skates, co-founder and CEO. The amplitude only increased 9.6% from its opening price.

When a company’s shares go up 30%, 50%, or 100% in its early days, the IPO was poorly priced, Skates said. Companies “are giving away a huge amount of value for no other reason than a good newspaper headline,” Skates said.

For businesses, analyst coverage is important. Analysts have clients. They write down the actions. They give perspectives. And direct quotes typically don’t generate the same level of analyst coverage as IPOs, which have a road show.

Most listed companies have replaced the roadshow with an “analysts day,” where investors, including ordinary people, learn about the company. Coinbase, for example, hosted a Reddit: “Ask us anything”.

But the lack of coverage from analysts isn’t necessarily a deal breaker. “If you’re Spotify, you know you’ll get coverage, so don’t worry. People won’t ignore a company with a market cap of $ 30 billion, ”said Carmen of Wellington.

Skates didn’t seem fazed that Amplitude had to contact analysts and investors.

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

Traditional IPOs, Skates said, are getting “a little more investor interest, but that’s because they’re making a huge [million] reveal.

“As a CEO, you don’t want investors looking for a quick return on stocks. You really want them to be long term.

Write to Luisa Beltran at [email protected]

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