Spotify was the first direct listing, on April 2018. The company's banner hung from the New York Stock Exchange that morning.
Spencer Platt/Getty ImagesDirect listings have jumped 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 keep choosing IPOs or SPAC mergers, experts tell Barron’s.
So far this year, 942 companies have gone public—raising $299 billion, numbers from Dealogic show. The totals for initial public offerings and special-purpose acquisition company mergers are 383 and 559, respectively.
By comparison, only seven firms have used a direct listing—raising not one dime, simply listing their stocks on exchanges. Still, the seven is more than half of the 13 companies to use a direct listing since 2018.
“We may see more late-stage companies seeking 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 instead provide companies another avenue to the public markets.”
IPO expert Jay Ritter also expects the number of direct listings to increase—as long as there are no blowups like an accounting scandal that could taint the method.
“More and more companies will use direct listings to avoid selling underpriced shares in a traditional IPO or to avoid the dilution due to sponsor shares that come with a SPAC merger,” said Ritter, a University of Florida finance professor who studies IPOs.
The first direct listing came nearly four years ago, on April 3, 2018, when Spotify (SPOT) opened 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 nearly $27 billion valuation.
In the next two years, five companies direct listed: Watford Holdings, the reinsurance firm; the messaging app Slack Technologies; 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 with a month still to go—the total stands at seven: Roblox (RBLX), the gaming platform; cryptocurrency exchange Coinbase (COIN); Squarespace (SQSP), the website design and hosting firm; the money transfer firm Wise; ZipRecruiter (ZIP), the employment marketplace; Amplitude (AMPL), the product analytics 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 a direct listing, Bloomberg reported. Stripe didn’t return requests for comment.
Of the 13 direct listings since 2018, eight picked the NYSE and four settled on the Nasdaq. Wise listed its shares on the London Stock Exchange in July.
The mechanics
The appeal of a direct listing might not be obvious to the retail investor. After all, like an IPO or a SPAC 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, 12 to 18 months, according to David Ethridge, co-lead of PwC’s IPO Services. The 12 to 18 months includes the time that companies need to prepare for life as a public entities, Ethridge said.
But there are real differences: how money is raised and where it goes, and the role played by investment banks.
First, the money. Companies that opt for an IPO typically need fresh capital and use the offering to sell stock to investors. In a direct listing, shareholders—most often founders, investors who were in on the ground floor, and employees—sell their stock and they get the money, not the company.
Two experts—Magdalena Heinrich, Bank of America’s co-head of U.S. technology equity capital markets and venture capitalist Eric Liaw—point out that companies that don’t immediately need capital are better suited for a direct listing.
“The key criteria for [companies] choosing a direct listing is whether their balance sheet is sufficiently strong that they don’t need to raise money in the offering,” said Liaw, a general partner at IVP, a venture-capital firm that has invested in over 400 companies, including 125 publicly traded entities.
Second, the investment banks. In an IPO, banks underwrite the sale of shares. They help write the prospectus, set the price for the offering, sell the stock to investors through their network the night before the company lists, help set the roadshow, and give support once the stock begins trading.
Consequently, underwriting fees are the single biggest direct cost in an IPO— an average of 5% to 7% of gross IPO proceeds, Ethridge said.
Several banks typically work on a big IPO and split the fees. For example, Airbnb (ABNB), the home sharing service, raised $3.5 billion last December with its public offering. Three dozen banks, led by Morgan Stanley and Goldman Sachs , worked on the deal.
In a direct listing, banks act as financial advisors. Still, they help prepare the company’s registration statement, and assist with positioning the business, according to a guide on 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 deals.
Their fees are “materially” less, but just how much less is hard to determine with only a dozen direct listings, Ethridge said.
“It wouldn’t surprise me if the total fees paid of gross spread is 50% of what might otherwise be paid [in IPOs],” he said.
Oddly enough, though, banks generally make as much with a direct listing because fewer work on a deal so the split is bigger, said Richard Truesdell, co-head of global capital markets at Davis Polk, who worked on the Spotify and Watford direct listings.
Coinbase is a case in point. The crypto exchange ended its first day as a public company in March with a near $86 billion market cap. Its financial advisors totaled four, including Goldman Sachs and JP Morgan.
“Even though the total comp is substantially less, it’s not less per bank,” Truesdell said
The investors
The real winners in a direct listing could very well be investors—both institutions and regular people.
Institutions like direct listings because many don’t have a lockup—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 the company begins trading.
No lockup makes it easier for the likes of Wellington Management, which manages $1.4 trillion in assets, to build positions “right out of the shoot,” said Michael Carmen, a senior managing director at Wellington, which has helped take more than 2,000 companies public since 2010—four through direct listings.
More important, direct listings can be better for regular people. In an IPO, institutional investors will buy shares of a company at the offer price the night before the debut. Then, the next day, the stock will jump in price as all kinds of investors try to get shares.
“Retail drives the pop that first day,” Truesdell, of Davis Polk, told Barron’s.
The upshot: The stock for a traditional IPO can often become too expensive for the regular people during its first day of trading. Consider Airbnb again. Shares more than doubled from the $68 IPO price, closing at $144.71.
“With a direct listing, [retail investors] have all the same rights as other institutions out there,” said Wellington’s Carmen.
Avoiding the first-day pop is one reason why Amplitude chose a direct listing, said Spenser Skates, co-founder and CEO. Amplitude rose a mere 9.6% from its opening price.
When a company’s stock rises 30% or 50% or 100% in its debut, the IPO was mispriced, Skates said. Companies are “giving up a huge 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 stocks. They give outlooks. And direct listings don’t typically generate the same level of analyst coverage as IPOs, which have a roadshow.
Most of the companies that have direct listed replaced the roadshow with an “analyst day,” where investors, including regular people, learn about the business. Coinbase, for example, hosted a Reddit: “Ask Us Anything.”
But the lack of analyst coverage isn’t necessarily a deal breaker. “If you are Spotify you know you’ll get coverage so you don’t worry about it. People won’t ignore a $30 billion market cap company,” Wellington’s Carmen said.
Skates didn’t seem fazed that Amplitude had to reach out to the analysts—and investors.
“It’s a little more work on part of companies to make sure all of the information is out there,” he said. “You still get the analyst coverage.”
Traditional IPOs, Skates said, get a “little more investor interest but that’s because they’re doing a massive multi-hundred [million] giveaway.
“As a CEO, you don’t want investors looking for a quick flip on stock. You really want those committed to the long term.”
Write to Luisa Beltran at luisa.beltran@dowjones.com
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