What is a Direct listing and where have they gone?

03 October, 2022

David Ethridge
IPO Services Co-Leader, PwC US

Intro

Direct Listings (DLs) as most investors know them today began with the listing of Spotify in April 2018. The listing by this technology “disruptor” was hailed as a 2.0 of sorts for Initial Public Offerings (IPO), holding promise as an attractive path private companies would increasingly choose when going  public. Despite the initial enthusiasm, this has not happened. 

Direct Listings: A short history

Following Spotify’s listing, another high profile technology company, Slack, went public by way of a DL in 2019 and three more executed a DL in 2020. Each of those listings furthered the DL product evolution as financial advisors, companies and investors gathered experience. However, only 14 companies (Table 1) in total have used a DL, which amounts to 1.7% of all IPOs since March 31, 2018. Further, in 2021 when annual IPO volume nearly doubled to 338 deals (excluding special purpose acquisition companies (SPACs)) and valuations were particularly robust in the technology sector, only six companies or 1.8% of IPOs took advantage of the 2.0 IPO approach.  

Table 1: Summary of Direct Listings

 

 

 

 

Since listing 

 

Name of DL

Listing Day

Mkt Cap at DL ($M) (1)

Opening Price

High

Low

Return to Current

Spotify 

4/3/2018 

 $29,549  

 $165.90  

 $364.59  

 $91.94  

-34% 

Watford 

3/28/2019 

 $573  

 $25.26  

 $36.00  

 $11.54  

39% (2)

Slack 

6/20/2019 

 $19,424  

 $26.00  

 $31.25  

 $5.30  

17% (2)

Palantir 

9/30/2020 

 $21,735  

 $7.25  

 $39.00  

 $6.71  

-19% 

Asana 

9/30/2020 

 $4,156  

 $21.00  

 $142.68  

 $16.66  

-26% 

Thryv 

10/1/2020 

 $432  

 $12.40  

 $41.69  

 $8.10  

92% 

Roblox 

3/10/2022 

 $34,496  

 $45.00  

 $51.15  

 $23.19  

-36% 

Coinbase 

4/14/2021 

 $99,555  

 $250.00  

 $357.39  

 $47.02  

-81% 

Squarespace 

5/19/2021 

 $6,532  

 $50.00  

 $64.10  

 $14.44  

-56% 

Ziprecruiter 

5/26/2021 

 $2,146  

 $18.00  

 $32.15  

 $14.56  

-19% 

Wise 

7/2/2021 

 $10,980  

 $11.04  

 $11.50  

 $2.97  

-47% 

Amplitude 

9/28/2021 

 $5,138  

 $35.00  

 $84.80  

 $13.96  

-69% 

Warby Parker 

9/29/2021 

 $6,024  

 $40.00  

 $59.50  

 $11.18  

-76% 

Bright Green 

5/17/2022 

 $2,530  

 $15.99  

 $48.08  

 $1.16  

-93% 

Source: S&P Capital IQ and company filings. (1) Market cap is calculated by using the opening trade price and fully diluted shares outstanding at open. Values maybe off due to rounding. Returns calculated from first day open price to 8/23/22. (2) Watford and Slack return calculated using the last price at acquisition date.  

 Key differences of direct listings compared to an IPO

While the differences between a DL and an IPO are numerous, we highlight three main distinctions: 

  1. The company has not sold shares to the new investors. Instead, the early investors (management and venture capitalists) as well as employees sell a portion of their shares. As such, companies needing to raise capital in an IPO to support their growth (historically the main driver of IPO activity) will be unlikely to choose a DL. 
  2. A DL is not underwritten by investment banks. Being a financial advisor versus an underwriter changes their involvement in material ways that may result in less fees for the company, but also brings less support (not managing the roadshow, not using a greenshoe structure, not committing research).
  3. All shares of the company are tradeable following the listing (versus just the shares offered in most IPOs) and early investors can sell their shares immediately following the listing. That is, they do not have to wait 180 days as is typical with IPOs.

Key challenges ahead

IPO activity has been severely curtailed in 2022 as the broader markets are down significantly and investors continue to ponder significant economic uncertainties including the first real instance of inflation since the early 1980’s, the impact of the Fed’s response and significant geopolitical uncertainties. However, we see other factors that could be vital to seeing DLs rise in activity to a level not regarded as niche. First, a class action shareholder lawsuit filed following Slack’s offering has continued to move through the courts. Its resolution could have implications for how attractive DL’s remain, as well as how they are executed. Second, despite an update in listing rules that allows companies to raise cash for the company itself (and not just its early investors and employees), the update created risks to execution and made its use unlikely.

Conclusion

Once the broader markets stabilize and IPO activity resumes, we expect to see DLs return as well. However, until companies can confidently use a DL to raise primary capital, it will remain a niche product for larger, high profile companies having plenty of cash or access to other sources of capital. For that select group of DL aspirants, we expect many will prepare for life as a public company and make the ultimate decision of path – IPO or DL – late in the process of their public company readiness process. 

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