Direct Listing: The new future for going public?

October 24, 2019

2 min read

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What's going on here?

Following the recent initial public offering (IPO) flops of Uber, Lyft and WeWork, representatives of over 100 major tech and private equity firms met this month in San Francisco to discuss an alternative method of going public: direct listing.

What does this mean?

IPOs and direct listing are two methods for a company to raise capital by listing shares on a public exchange. The crucial difference is that IPOs entail the issuing of new shares, while direct listing takes existing shares to the market only

The head of last week’s conference, Ben Gurley (formerly of Uber) advocates a two-part method of direct listing in which companies firstly sell shares to investors (like private equity firms) in a pre-listing round to raise capital. The company then publicly lists the shares on the market where the standard process then occurs, with shares free to be traded at the market price.

What's the big picture effect?

That technology companies and private equity firms met to discuss direct listing proves that the sector is beginning to take direct listing more seriously. Two industry titans, Spotify and Slack, recently went to market by the direct listing process, and there are reports that Airbnb will do the same in 2020. The movement is in part a response to fears by tech companies that investment banks, who underwrite IPOs and collect a fee of 2-8% per share, are undervaluing tech IPOs. Research by Florida University supported this idea, demonstrating that Goldman Sachs and Morgan Stanley under-list firms by 33.5% and 29.3% respectively. Under-listing is a well-known tactic of banks and serves to drive up demand for the shares, making the banks millions in the process. 

Direct listing is still in its infancy and so it remains to be seen whether this is just a temporary trend. In spite of the costly process, IPOs still offer some benefits. For example, Zoom and Crowdstrike CEOs recently noted that going through the conventional IPO process created a boost to their sales. The good coverage following their IPOs engaged more customers, which translated into sales for their services. This is less relevant for companies with established client bases, like Spotify and Slack, for whom direct listing presents an obvious economical choice. Interestingly, since listing directly Spotify and Slack have been performing poorly, leading many to believe that the direct listing process overvalued initial value of the shares. 

Going forward, if direct listing becomes commonplace there are a number of questions of how the process could be regularised, as there is at present no established mechanism.

Report written by Alexander Kerr

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