Capital Markets Corporate

December 13, 2019

Is it the end of the traditional IPO?


Several companies that launched on global stock markets in 2019 abandoned the traditional IPO process, instead opting for the new trend of a direct listing. But is this new route favourable for every company looking to go public, or is it only a luxury for well-known brands?

Recent Dealogic data showed that this year 845 companies have completed IPOs globally, 25%  fewer than during the same period in 2018 and the lowest level in three years. But, with political uncertainty potentially returning to our shores, and the possibility of improved investor sentiment in 2020, will more companies be exploring this new approach to creating liquidity?

A direct listing is a process for a company to go public without going through the traditional IPO process. The company does not work with an investment bank to underwrite the issuing of stock which means that the opening stock price will be completely subject to market demand and potential market swings. Instead of raising new outside capital like an IPO, a company’s employees and investors convert their ownership into stock that is then listed on a stock exchange. In 2019, both Slack and Spotify notably opted for this route to market.

Through a direct listing, a company does not have to pay an underwriter, saving as much as 7% of the money raised. There is also no lock up period, which means that major shareholders don’t have to wait until after the shares trade for six months before they can sell – contrary to an IPO.

Proponents argue that a direct listing provides a fairer and more transparent market from the outset, offering ordinary investors a chance to bet on a company’s future growth.

A direct listing also means that there isn’t the opportunity to communicate to the investor community and build an equity story to potential investors on a three-week roadshow, as is the case with an IPO. Spotify and Slack were well-known enough so that everyone knew who they were and what they were about.

Essentially, they didn’t need to worry about building a case to the investor community, because their brands did the marketing for them. It was a risk they could afford to take and clearly investors were suitably clued up – Spotify shares ended 12% up on the first day of trading, and Slack ended its first day up 48% on its NYSE reference price.

However, clearly this isn’t the luxury that most companies have. If a business isn’t a household name and doesn’t have the international brand awareness needed to fuel a direct listing, then this route to going public could prove difficult. Furthermore, both Slack and Spotify are relatively straightforward direct to consumer products and enjoyed years of high-profile PR in the lead up to their listings. Most firms looking to go public will likely be more niche and have a more technical or esoteric proposition within a specific vertical.

So, while one should expect to see more direct listings next year, especially amongst well-known big tech firms and unicorns, most companies should be mindful that choosing a direct listing over an IPO wouldn’t be the best route if doesn’t have that stellar brand awareness.

Direct listings will continue to be the talk of markets in 2020, but for the many, there will still be a need to develop a strong equity story and eloquently communicate it to the investor and analyst community.