US companies are taking greater control over their stock market debuts by turning to direct listings and new technologies to price their shares, pushing back on the strictures of initial public offerings that have defined equity capital markets for decades.
Software companies Palantir and Asana both sidestepped the traditional IPO process to join the stock market through direct listings this week, building on similar moves from Slack last year and Spotify in 2018. Several other companies have chosen to go public through mergers with listed blank-cheque vehicles known as Spacs.
Taken together, these changes form a new playbook for companies looking to list on the stock market, promising executives a greater say in the exercise while dimming the role of investment banks.
“There is a desire for companies to have a more open and transparent process,” said Neil Kell, chairman of global equity capital markets for Bank of America.
Direct listings let existing shareholders, including employees, sell their stock on the open market on the first day of trading, but do not allow companies to raise capital by selling newly created shares. This is a departure from the IPO, where investment banks typically allocate new stock to institutional investors, such as mutual funds and hedge funds, picking out attractive investors likely to hold the shares for the long term.
Recent direct listings typify the kind of company that is able to list shares without raising money: well-known technology names with prominent backers. The oldest of the four, Palantir, was founded 17 years ago and had raised billions of dollars from private investors over that time.
“We aren’t direct listing zealots,” said Shyam Sankar, Palantir chief operating officer. But the process provided the company closer discussions with potential investors and “a little more control” compared with a traditional IPO, he added.
“We felt the price discovery was much better and the cost of capital was lower,” said Dustin Moskovitz, chief executive of Asana.
Shares in Palantir closed below their opening price on Wednesday, while Asana’s stock rose more than 10 per cent on the day.
The big difference between direct listings and an IPO — the raising of capital — may soon disappear. In August, US securities regulators granted the New York Stock Exchange approval for companies to raise money alongside a direct listing. But the decision has been challenged by a group representing institutional investors, and companies have yet to test the new approach.
The approach would skip the step of meting out shares to specific investors, a task handled by the banks in an IPO, limiting the ability for companies to select investors that may be seen as attractive, such as mutual funds that may hold on to the stock for the long term. Instead, new shares would be floated in an auction on the first day of trading.
“I’m completely puzzled by the concept of a company that wants to directly raise capital, perhaps take on significant incremental liability, and have no say whatsoever over the share price or the first round of shareholders,” Lise Buyer, an IPO adviser in Silicon Valley, said of the proposed direct listing process.
Banks are also employing technology to refine the IPO. Last month, video game software company Unity raised $1.3bn after would-be investors submitted the prices they were willing to pay for blocks of stock into a portal managed by Goldman Sachs, the lead underwriter on the listing. The company was able to set its price after the bids came in, and had discretion on how to allocate the capital.
“It is the option that puts the most control in management’s hands, although certainly they will still take advice from the bankers,” said Ms Buyer, who advised Unity on its IPO.
Unity ultimately settled on a slightly lower price than the top end of investor demand, to make sure certain investors were included, according to people briefed on the process.
“There is a tremendous amount of interest in moving the process forward,” said Matt Walsh, who leads technology, media and telecoms equity capital markets for Credit Suisse, a lead underwriter on the Unity deal.
Mr Walsh said executives felt that they had a greater view of shareholder demand with this approach. “It’s a huge step forward.”
The recent spurt of innovation comes alongside the thunderous rise of Spacs, which raise capital from investors and sit on the stock market until they merge with a target company, giving it a listing.
Spacs have a history of targeting underperforming and sometimes fraudulent businesses, but of late, these so-called blank cheque companies have attracted high-profile sponsors, including Bill Ackman, who in July raised $4bn in the largest Spac to date.
Investors have ploughed $41.7bn into US Spacs so far this year, triple the sum raised last year, the prior high water mark, and close to the $52.8bn raised by IPOs.
Mr Walsh said Spacs offered another way for companies “to remove inefficiencies” from their stock market debut. “The commonality between direct listings . . . is that they establish a true demand curve and set a clearing price for a company’s shares.”
Additional reporting by Richard Waters in San Francisco