The share value of companies that went public using a direct listing within a study period rose 64.4% compared to 26.8% for traditional IPO companies, The Wall Street Journal reported using a University of Florida analysis.
Few companies pursue the method in part because it was originally devised as a way for existing investors to exit by selling their shares publicly and not to generate new capital, although that’s changing. Last year, the SEC began allowing a hybrid approach, called a primary direct floor listing, in which companies can both raise new money and give existing investors an exit through the public sale of their shares.
Even with the new primary approach, direct listings are expected to remain a specialty for a small segment of companies; without the kind of underwriting and marketing support from Wall Street banks that are a foundation of traditional IPOs, companies must be well-established and high-profile enough to attract investors on their own.
“You really do have to have your own marketing machine in force,” Sam Dibble, an attorney with Baker Botts, told CFO Dive. “It really is just like a wind-it-up-and-go on the first day of trading, [given the] supply and demand element. And once the genie’s out of the bottle, you never know what’s going to happen to the stock prices. There’s no major investment bank with greenshoe options and over allotments.”
Coinbase, which went public directly in April, is a good example of the kind of company that can make the method work to its advantage with its name recognition and connection to the surge of interest in cryptocurrency.
Same thing with Spotify and Slack, two other high-profile companies whose cloud-based software-as-a-service (SaaS) business models have surged in the last few years.
“Those were up and coming companies, then unicorns with really high valuations,” said Dibble.
The University of Florida analysis looked at the performance of eight companies, including Coinbase and Spotify, by comparing their stock prices at the end of the study period to the prices of S&P 500 companies. In addition to the 37.6 percentage-point price performance gap — 64.4% compared to 26.8% — it found a 33.3 percentage-point gap — 64.4% compared to 31.1% — between direct listing companies and those included in the Renaissance index fund, considered a broader index than the S&P 500.
Other direct-listing companies analyzed were Asana, Palantir, Thryv, Roblox, SquareSpace and ZipRecruiter.
The findings speak to the select nature of the direct-listing companies, Jay Ritter, a University of Florida finance professor who conducted the analysis, told The Wall Street Journal.
“It reflects the fact that the group that’s chosen to do direct listings is a really high-quality group of companies,” he said.
One of the next companies lined up to go public directly, Warby Parker, appears to follow the mold set by the others. It’s a high-profile company whose business model has held up over the last few years, suggesting it could see a strong valuation without the support of Wall Street underwriting and marketing.
“I haven’t heard of a company who has done a direct listing who has expressed regrets about doing it,” Ritter told the Journal.