Direct Listings – The Future of going Public?

The path of entry into the mammoth world of Public Markets diverges two ways – a Direct Listing and a traditional IPO. Most companies we know prefer the IPO route, where new shares are floated and sold to the public. Some stable and robust companies don’t need the additional capital from apportioning the company. The shares that already exist with stakeholders or employees are offered to public investment in a Direct Listing.

As the number of companies opting for a Direct Listing increases, the trend stands testament to the staying power of this alternative path to public markets. Although the group of companies who have debuted in the US Stock Exchange through direct listings is still relatively small, they have outperformed the S&P 500 and a key broader index for initial public offerings during the same period, according to a recent study.

This is a reflection on the quality of companies that decide to list directly. This is further corroborated by the fact that companies that choose this path are often in great financial shape already and do not need the additional capital that a traditional IPO guarantees.

In the past, companies didn’t have an option apart from an IPO. The path of Direct Listings has also reduced the role of Banks, thereby making the fee pool smaller than the ones that come with large IPOs. In typical big IPOs, a dozen banks or more can share fees of $100 million. In direct listings, companies still pay fees—but slimmer ones, often in the tens of millions for similar deals. Only a handful of banks are chosen for Direct Listings, and even these banks act only as advisers and not the usual underwriters, as is the case in IPOs.

The trend of Direct Listings started with Spotify pioneering this method in 2018. Since then, nine other firms have joined the party due to the smooth operations of Direct Listing. For all the ten listings, the level of volatility in the first few days of trading has not been very different from what IPOs generally face.

In 2021, over 270 companies have raised more than $104 billion on U.S. exchanges through traditional IPOs, setting a record for the highest volume to date. Yet, forecasts show that Direct Listings seem to be the preferred method of the future, with more companies considering Direct Listings over the next couple of quarters.

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