The stock value of companies that went public with a direct listing during a study period rose 64.4% compared to 26.8% for traditional IPOs, the Wall Street Journal reported, based on an analysis by the University of Florida.
Since being approved by the Securities and Exchange Commission (SEC) in 2018, only 10 companies have gone public using the direct method to fuel declining interest in going public.
Few companies also follow the method because it was originally intended as a way for existing investors to get out by publicly selling their shares and not generate new capital, although that is changing. Last year, the SEC began approving a hybrid approach known as primary direct floor listing, which allows companies to both raise new money and allow existing investors to exit by publicly selling their shares.
Even with the new primary approach, direct listings are expected to remain a specialty for a small segment of companies; Without the underwriting and marketing support from Wall Street banks that form the basis of traditional IPOs, companies must be well-established and high-profile enough to attract investors on their own.
“You really need to have your own marketing machinery in place,” Sam Dibble, an attorney with Baker Botts, told CFO Dive. “It’s really like a wind-it-up-and-go on the first day of trading, [given the] Supply and demand element. And once the genie is out of the bottle, you never know what will happen to stock prices. There is no big investment bank with greenshoe options and over-allotments. “
Coinbase, which went direct on the stock exchange in April, is a good example of the type of company that can take advantage of the method because of its level of awareness and connection to the growing interest in the method Cryptocurrency.
The same goes for Spotify and Slack, two other high-profile companies whose cloud-based software-as-a-service (SaaS) model has grown dramatically in recent years.
“Those were emerging companies, then unicorns with really high ratings,” Dibble said.
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 period against the prices of S&P 500 companies. In addition to the price-performance gap of 37.6 percentage points – 64.4% versus 26.8% – a gap of 33.3 percentage points was found – 64.4% versus 31.1% – between directly listed companies and those included in the Renaissance Index Fund, which is considered a broader index for IPOs than the S&P 500.
Other direct listing companies analyzed were Asana, Palantir, Thryv, Roblox, SquareSpace and ZipRecruiter.
The results speak for the selected nature of the directly publicly traded 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 selected for direct listing is a really high quality group of companies,” he said.
One of the next companies to go public, Warby Parker, appears to be following the others’ lead. It is a high profile company whose business model has proven itself over the past few years, suggesting that without the help of underwriting and marketing it could have a strong valuation on Wall Street.
“I have never heard of a company that did a direct listing that regretted doing so,” Ritter told the Journal.