The stage is set for a direct listing takeover
February 24, 2021

The stage is set for a direct listing takeover

Forge Team

From Slack to Spotify, and Palantir to Asana – many high profile private companies have opted to go public via direct listings, opting out of traditional IPOs, SPACs, or other alternatives in recent years. A number of factors have been driving this spike, and now thanks to additional timely developments in the markets – we can expect to see a flood of direct listings in 2021 and beyond.

A company’s public debut can be considered a success if it ultimately provides value to investors, and lists shares at an accurate price. Direct listings are conducive to this outcome, due to several systemic components: they minimize costs by cutting underwriters out of the process, they are inclusive by giving everyone – not just those involved in the roadshow – the chance to participate, and they eliminate restrictions that exist with traditional IPOs, such as lockup periods.

Today, the landscape is shifting even more in favor of direct listings, as the Securities and Exchange Commission passed a new ruling that removes one key drawback from the process. According to the SEC’s December 2020 ruling, companies will now be able to sell shares directly on the NYSE to raise capital. Those who engage in a direct listing now won’t have to rely on investment banks to shop their shares to institutional investors the day before their debut. Instead, public investors get first crack at floated shares and, with this ruling, companies can float new shares directly to the public markets to raise capital.

This marks a significant change and sweetens the deal for direct listing hopefuls, as they previously couldn’t raise capital in a direct listing event, they could only sell existing shares ( those owned by executives and employees). This change helps startups to save on bank fees and capture more of the gains in their share prices upon going public.

Today’s hottest unicorns take notes on how to pull off the ideal direct listing

Looking ahead in 2021, Coinbase, UiPath and Databricks are among this year’s most highly anticipated tech public offerings. These companies seem to be laying the groundwork for direct listings, and as all eyes are on them, should they (and any other unicorns) choose this increasingly popular route, the private markets are a critical resource that can help to ensure their public success.

Palantir is a fitting example. Ahead of its direct listing in September of 2020, the company leveraged data from the private markets, where buyers and sellers had been trading its shares on Forge’s platform for years. Ultimately, Palantir’s reference price landed directly in the middle of what investors on the private markets were paying – and at the end of its first day of trading, Palantir closed within 10% of that price. While some market-watchers declared it a bust, they failed to correlate that the stock’s debut price accurately reflected the stock’s value and that it was stakeholders – employees, execs and investors – that reaped the benefits of that accurate pricing. In traditional IPOs, a big pop on day 1 benefits the institutional investors who got the early go at the stock the day before the debut. When it jumps, employees and executives don’t see those benefits.

Palantir is just one of many case studies that illustrates how private market trading data can help companies determine realistic reference prices. Overall, the delta between recent direct listings and where the stock opened for those companies is approximately 30%. Meanwhile, we’ve seen the likes of Snowflake and that pursued the traditional IPO route leave big money on the table, with ~100%+ jumps on listing day.

The secret to a successful direct listing: the private markets

As new industry regulations are making direct listings more attractive, the private markets are here to help unicorns take advantage of the evolving landscape. By leveraging insights on platforms like Forge, these companies can control their own destinies in timing and pricing their public debuts. This also means they have a better chance at avoiding common IPO disasters, such as botched reference prices, which can cause employees and founders and investors to miss out.

The markets are changing, and Forge’s platform serves as both a vehicle for that change, as well as a window for strategic decision making that caters to every unicorn’s specific needs. Forge’s solutions are designed to help companies and investors better understand pricing and get ahead of rising market trends.

To learn more about how we help companies manage their direct listings, click here.

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