Direct listings – the new IPO?

Two household names in the world of tech recently decided to go public by holding direct listings instead of going down the well-trodden route of the Initial Public Offering (IPO).

Slack, which provides team communication solutions to businesses, and Spotify, a music streaming business, both decided a liquidity event for their shareholders in the form of a direct listing was a better option than an IPO.

Despite both organisations’ unremarkable performance as public businesses since their direct listings, technology businesses planning exit strategies are increasingly considering direct listings, which have some distinct advantages, as a viable alternative to IPOs. Unlike IPOs, direct listings do not issue new shares and thus do not raise any new money; rather, existing shareholders can realise gains by offering their shares up to the market. Existing shareholders therefore do not suffer any dilution and are not hindered by lock-up periods which would normally come with an IPO. One drawback of a direct listing is potential price volatility of shares, especially in early trading; this is of course dependent on enough supply and demand in the market.

Intermediaries and investment banks, who would normally be involved in IPOs by helping to drum up interest from investors in exchange for hefty fees, have a direct interest in where the market goes from here; the overall pool of fees available in direct listings are significantly less than those in IPOs. To that end, the likes of Morgan Stanley and Goldman Sachs have recently held conferences in which time has been dedicated specifically to exploring direct listings in order to position themselves favourably should IPOs fall out of favour. Both organisation were indeed involved as advisors in the direct listings of Slack and Spotify.

With Airbnb rumoured to be considering a direct listing, a successful debut into the public markets could pave the way for more businesses choosing direct listings as a viable and efficient route towards liquidity for their shareholders.  

Zafar is one of our tech consultants who also manages our partner; Forbury Investment Network