Tech unicorns Palantir and Asana joined the public markets yesterday (Sept. 30) using direct listings, which are seen as a challenge to the traditional process for initial public offerings. The results suggest direct listings could become more commonplace.
This year IPOs, particularly the ones for splashy tech companies, have had big gains in their share price on their first day of trading, which is why Wall Street was watching closely to see if yesterday’s direct listings would do the same. The stock of Palantir, the data-mining firm backed by billionaire Peter Thiel, fell slightly to $9.50 after opening for trading at about $10, according to FactSet data. Shares of software maker Asana closed at $28.80 after starting out at about $27. That contrasts with an average pop of about 38% on the first day of trading for all IPOs this year, according to data compiled by University of Florida professor Jay Ritter, the highest average of any year since the dot-com bubble.
That opening pop is contentious, as it’s money that could theoretically have gone into the pockets of the people who invested in the company before it listed. This year, companies have left about $24 billion on the table, not including yesterday’s direct listings, according to Ritter’s analysis. That’s approaching the kind of money left on the table during the bubble years in 1999 and 2000.
In a traditional IPO, bankers go on a roadshow with company executives, meeting with investors in different cities to drum up interest in the deal. At the end of the process, bankers set the initial offering price for the shares. They typically set the price a little below what the market will bear. If everything works as hoped, this ensures the shares jump on the first day of trading, handing the banks’ investor customers a quick return. That’s nice for banks and their institutional investor clients (who have taken some risk by buying shares in the IPO), but the money comes out of the pocket of the issuing company’s founders and other early investors.
Direct listings, which strip out some of the usual hand-holding that comes with an IPO, are an attractive alternative for some issuers. There’s no roadshow, the fees are lower, and the offering price gets set on an exchange, not by investment bankers. As a result, they’re seen as a way to keep some of that money from frittering away on the first day of trading. Spotify, the streaming music service, pioneered direct listings in 2018, and messaging service Slack followed in 2019.
“The stocks are trading close to the opening trade, so sellers did not leave money on the table as they probably would have with a traditional IPO,” Ritter said in an email about the Palantir and Asana listings. “There will be more direct listings, mainly by prominent companies (unicorns), as long as the underpricing of traditional IPOs stays high.”
Public listings are nerve-wracking for everyone involved, as they await the moment of truth when shares start changing hands, and there was at least one glitch yesterday. A snag in employee stock plan software provided by Morgan Stanley stopped some Palantir investors from being able to immediately sell their stakes, according to the Wall Street Journal (paywall). By all indications, trading on New York Stock Exchange, where both direct listings took place, went off without a hitch.
“We experienced slowness that may have resulted in delayed logins into our system,” said a spokesperson for Shareworks by Morgan Stanley. “At all times our call centers were available to execute trades. We will work through any issue that is brought to our attention and ensure that no employee will be disadvantaged.”
Smaller, lesser known companies are more likely to need the full suite of investment banking services. (One drawback to direct listings is that they haven’t provided a path to immediately raise fresh capital, although NYSE is aiming to provide a way to do so.) It may have been understandable for some IPO underpricing earlier this year, given the uncertainty caused by the Covid-19 pandemic. But the stock market has erased its losses and tech IPOs have been on fire. Startup investors are hungry to get their share of it.