Ringing the bell at the New York Stock Exchange used to be a rite of passage for American chief executives. It signalled that the company had reached an important moment in its development, when it would ask the public to back its future and invest in its shares. One of the largest listings of this year, however, did something different. The chief executive of Palantir, a data analytics company, did not show up for the opening bell — and nor did he offer any new shares to the public on listing.
Palantir’s market debut as a direct listing, in which no new shares in the company are created or sold, rather than through a more conventional initial public offering, deserves attention for two reasons. It caps a recent dash for the public markets by technology companies that holds echoes of the dotcom boom of two decades ago, and stands in stark contrast to the prevailing economic uncertainty. More worrying is the fact that the company’s debut highlights a shift in how businesses are approaching public markets. An increasing number of executives are sidestepping the traditional IPO, which has been the preferred route to market for the past few decades, in favour of alternatives — with potential downsides for retail investors.
One example is the recent boom in blank cheque companies or special purpose acquisition vehicles (Spacs) where founders raise money through a listing and then find a business to buy within a set period. Spacs can ease a company’s route to market as they do not have to comply with the tougher listing rules that apply to traditional floats. The rewards, too, are often skewed in favour of the founders. About 40 per cent of this year’s initial public offering volume has come from Spacs. The boom has now caught the attention of America’s Securities and Exchange Commission. The regulator recently said it was alert to the rise in cash shells and wanted to make sure there was sufficient transparency about insiders’ pay structures for investors.
Direct listings, too, carry risks. By not issuing new shares to raise capital, company founders are able to retain much tighter control. In the case of Palantir, there are genuine concerns over the company’s governance arrangements, which go to even greater lengths to entrench the control of the founders. Despite this, growth-hungry investors still bought the stock once it had listed.
It is no surprise that independent-minded tech entrepreneurs prefer a simpler route to market. Critics of traditional IPOs have long complained of expensive and cumbersome processes, and of underpricing by sponsoring banks. The fees pocketed by investment banks have also come under fire. Although they have fallen, banks still typically earn as much as 7 per cent on the proceeds of a new listing. Such criticisms are justified. Privately held companies that would otherwise have explored a traditional IPO have often either opted to stay private or are now among those being drawn to Spacs.
At a time of shrinking equity markets, new alternatives offering a route to market are welcome but not at any price. Supporters of the new crop of Spacs are promising greater transparency. What would also help, however, is a new approach to traditional IPOs. Some banks are already experimenting with different ways to ensure more realistic pricing. They are also loosening the conditions on lock-ups that restrict when and how employees can sell their shares after the listing. A company’s objectives when coming to market include raising capital to deliver on its strategy, and giving the public a chance to take part in future success. It would be a shame if those aims were lost in the current stock market frenzy.
"traditional" - Google News
October 02, 2020 at 03:43PM
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The traditional IPO needs a new lease of life - Financial Times
"traditional" - Google News
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