One advantage of bypassing the traditional U.S. IPO process is that direct-listing candidates can make their pitch to everyone. That’s what data-analytics outfit Palantir Technologies is doing on Wednesday with its planned investor day. The event is accessible to all, a contrast to the closed-door sessions with invited investors in initial public offerings. Direct listings are still rare, but that could soon change.
Palantir has lots of questions to address. There are governance concerns, not least the rationale for proposed variable-voting shares – designed to give its founders de facto control even if their economic interest in the company becomes very small. Others range from its 125 often government-related customers to the scope for growth given Chief Executive Alex Karp’s pickiness about clients.
How the answers go down remains to be seen. But companies taking the direct-listing path need to appeal to as many investors as possible, since the basic idea is that – unlike in an underwritten IPO – all or most of their shares become available to buy or sell from day one.
The exposure of an investor day may be even more important for Asana, which helps organizations manage people’s work. It’s the only other current candidate for a direct listing, and it has less name recognition than Palantir.
Direct listings have appealed to only a few companies so far. They avoid some of the constraints of an IPO and are more democratic, for example usually allowing employees to sell their stock right away if they want to. But direct listings have not in the past allowed companies to raise cash – one reason coronavirus-hit vacation-rental app Airbnb, which once liked the idea, is now aiming for a traditional listing.
That’s evolving, though, and the next cohort of direct-listing wannabes will be able to raise capital. The Securities and Exchange Commission last month approved a New York Stock Exchange rule permitting just that, and Nasdaq has asked for something similar.
Candidates would still face uncertainty over the price at which new shares would be sold, for example. Nonetheless, it’s a step towards a more flexible alternative to an IPO. It’s too late for Palantir, Asana or even Airbnb to take advantage. Looking ahead to 2021, though, direct listings with built-in capital raising could become a new trend.