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Wall Street now 'inundated' with direct listing inquiries

A flood of interest in direct listings is sweeping across Wall Street.

Popularized by Swedish music-streaming company Spotify Technology SA, the direct listing is becoming the favored route to the public market for some venture capitalists. Those early backers are pushing direct listings because they allow companies to list on a U.S. stock exchange without many of the costs and caveats of a traditional initial public offering.

Now, as companies such as Airbnb Inc. weigh whether a direct listing is right for them, the gatekeepers that have helped usher companies into the public markets for decades are fielding a wave of inquiries about the cheaper, yet possibly riskier, model.

"There's a curiosity among companies to learn more about this new path to the marketplace," said John Tuttle, vice chairman and chief commercial officer at the Intercontinental Exchange Inc.-owned New York Stock Exchange, in an interview. "We'll definitely see more direct listings."

After Spotify opted for the IPO alternative in early 2018, direct listings captured headlines as speculation swirled around what other companies could use the model. But since Spotify went public, only two other companies — specialty insurer Watford Holdings Ltd. and workplace technology provider Slack Technologies Inc. — have used direct listings.

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Slack Technologies is one of three companies that have used direct listings to go public in the last two years.
Source: AP Photo

There are key distinctions between direct listings and IPOs, though Tuttle said both models ultimately share "a lot of the same DNA."

Unlike an IPO, a direct listing does not raise any capital for a company through a stock offering. That means it can bypass certain IPO formalities such as a roadshow to build institutional investor interest, underwriting fees to compensate the pack of investment banks that guide it into the public markets and a lock-up period where pre-offering stockholders are barred from selling their shares for what is usually six months.

Not every company may be well suited for a direct listing, though. Along with companies looking to raise capital, industry participants say direct listings may not be appropriate for smaller and more niche companies without strong brand recognition like Spotify. A direct listing does not create a formal opportunity to build up investor interest and a base of underwriters that can keep the stock stable after the company goes public.

"People reinvent the mousetrap once in a while, but none of them have really caught on," said Richard Truesdell Jr., a partner at Davis Polk who worked on Spotify's and Watford's direct listings, in an interview. "And I personally am somewhat skeptical that the direct listing is going to meaningfully change the IPO process, except for a handful of companies that are household names."

Still, Truesdell said his firm is "inundated" with calls about direct listings.

The wave of interest has been spearheaded by a campaign from the largest U.S. venture capitalists to encourage companies to at least consider the model.

At the heart of the effort is a lingering concern about the explicit and implicit costs of a traditional IPO. Benchmark General Partner Bill Gurley has recently criticized investment banks for pricing their clients' IPOs well below what the market appears willing to pay. A stock's price often jumps far above its IPO price in the first hour of trading, suggesting that the investment banks could have settled on a higher offering price to begin with.

Venture capital-backed IPOs were, on average, underpriced by 21.1% between July 2009 and June 2019, according to data from University of Florida finance professor Jay Ritter. Goldman Sachs Group Inc. and Morgan Stanley, which acted as financial advisers to Spotify and Slack in their direct listings, had the highest average underpricing rates of 33.8% and 29.1%, respectively. The two investment banks are also reportedly acting as the lead advisers on Airbnb's expected direct listing.

"Going public in the United States is more costly than it needs to be," Ritter said in an interview.

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Morgan Stanley declined to comment about Ritter's data. Goldman Sachs did not respond to a request for comment about the information.

But David Solomon, chairman and CEO of Goldman Sachs, did say on an Oct. 15 earnings call that the "noise" about disrupting the IPO process and the economic opportunity that lies there for investment banks "is overstated at this point."

The newfound attention around direct listings has also paved the way for what is slowly becoming an unofficial conference circuit about the model.

Ritter recently spoke at a private meeting on direct listings in Silicon Valley that Gurley helped orchestrate. Goldman Sachs hosted a panel on the topic at its Private Innovative Company Conference in Las Vegas on Oct. 3. Morgan Stanley will hold its own direct listings summit in San Francisco on Oct. 21. And Davis Polk is planning a direct listing event, Truesdell said.

"It's within everybody's best interest to really ask the questions and look to see what is the best path for them to become a publicly traded entity on a major U.S. exchange," said Jay Heller, Nasdaq Inc.'s head of capital markets and IPO execution, in an interview. "Whether or not we see a huge uptick in direct listings, only time will tell."