AI: Direct Listings as an Alternative to the Traditional IPO

Actionable Ideas for Companies and Sponsors

Direct Listings as an Alternative to the Traditional IPO

Direct Listings provide companies with an alternative path to a public offering, and we believe that Direct Listings will become a viable alternative for numerous companies considering IPOs. In 2019 there have been two Direct Listings completed for Slack ($15.5 billion market cap) and for Watford Holdings ($578 million market cap). A Direct Listing is the process by which a company registers and then lists shares. There is no actual capital raised by the company nor is there any underwriting done by a bank. The company facilitates the ability for buyers (institutional and retail investors) and sellers (any existing private investor in the company) to come together on listing day and begin transacting at the clearing price that is created through the normal supply and demand dynamics of any stock-opening process. One important benefit to existing shareholders is that there typically is no lock-up agreement, which allows them to sell their shares as soon as the listing goes live.

An investment bank’s role in a Direct Listing is to serve as an advisor to help position the company, identify investor targets, and advise the market maker on the appropriate opening price. Because there is no underwriting, many elements of a traditional IPO process become the responsibility of the company. Specifically: (i) the company hosts analyst and investor days that are web-cast without any support from a bank; (ii) the company coordinates its own roadshow to meet investors directly; and (iii) the company provides forward guidance prior to the listing, instead of relying on research analysts to create their own forecast models.

As a result, a Direct Listing is best suited for a companies that are more well-known among public investors (either through an extensive investor engagement strategy while still private or by virtue of selling a product or service with strong brand awareness) and has an active and recent history of private secondary share transactions that can be referenced as guidance for future valuation.