A conversation on Direct Listing vs. IPO | Goodbye Trumpism
Direct listing vs. IPO
On the hustings, both Donald Trump and Joe Biden promised to revive America’s economy from its pandemic-induced funk. Doing so will require a turn-around for corporate America, which has suffered a savage downturn. When the occupant of the White House starts his four year term in January, in what state will American business be? Some recent vital signs may look promising. America’s economy expanded at a record pace of 33%, on an annualised basis, in the third quarter. Total profits for the big firms of the S&P500 index have surpassed analyst’s expectations by roughly a fifth. In the meanwhile tech firms and their founders are lining up for a financial recovery by going public in the beginning in 2021. A trend is forming itself because these firms (such as AirBnB and Palantir) are now opting for a direct listing instead of a classic IPO. In order to understand why this trend is there and how companies are navigating them via these direct listings, I called in the help of my friend and one of the sharpest investment bankers in the game, Jean-Baptiste from JP Morgan.
L: What’s the difference between companies opting for direct listing instead of a classic IPO?
JB: There are two main differences between a direct listing and IPO:
- A direct listing is always a secondary sale, meaning that no new shares are issued in the market, but only shares from existing shareholders are sold. This means that the company does not raise additional capital
- There is no underwriter involved in a direct listing. An underwriter is an entity (typically an investment bank) that assists the company in going public meaning the bank will help with all the preparatory work (regulatory filings, assisting in making financials available to the public, help with the materials for the IPO (i.e. investor / analyst presentations), set up the necessary logistical arrangements for the company (e.g. meetings with investors throughout the process). In addition to this role, the bank also typically acts as a bookbuilder, i.e. meaning they will speak to / collect feedback from investors (typically institutional investors) to see if there is any demand for the shares and at which price investors would be willing to buy those shares. The underwriter also takes on part of the risk of an IPO transaction by providing guarantees to the Issuer (i.e. the company that wants to go public). This can be either through a hard underwriting agreement, whereby the bank agrees to buy a fixed amount of shares before the issue, or soft underwriting, whereby the bank agrees to buy a part of the shares after the issue (i.e. after pricing process has been completed).
L: Is it still in the interest of the investment bank to do direct listing instead of normal IPO?
JB: I would say that in the current macro environment which is surrounded by loads of uncertainty in the market (due to COVID and potential second lockdown, US election that are coming close, worldwide economy slowing down, etc.) it is less in the interest of an investment bank to advise on a direct listing given there are many factors that need to be monitored closely for the successful outcome of a transaction. Such factors are amongst others:
- Will there be enough market demand?
- Are investors willing to pay an attractive price in the current market environment?
- Is it currently a good time to go public?
Firstly, an investment bank has a deep pool of knowledge with institutional investors and can therefore pre-gauge investor sentiment in a pre-marketing phase.
Secondly, investors need more education in uncertain times. What will the impact of COVID be on the business plan of a company? How will future earnings look like for a company? (Note: investors are valuing companies on the basis of future cash flows, so a well-thought out and defendable business plan is crucial)
Thirdly, given investment banks have a wide range of experience in various industries and previous transactions, they can also guide the company in what the appropriate timing for a launch will be.
(In my personal opinion, direct listings could work when times are good and investors clearly understand BPs and there is not a lot of noise around the financials / fundamentals of business. They also work when companies do not need any additional capital. Given we are living in uncertain times, the above is becoming less the case)
L: Why choose for example JP Morgan vs any other investment bank as a company’s founder?
J.P. Morgan is the leading investment bank globally. For example (in EMEA), we are:
- the #1 in terms of deal value, number of deals since 2015 (for large deals)
In addition, it has a vast network of expertise (an army of advisors across different regions, industries, products) so we can always satisfy the client needs and build long-term relationships with clients
Anecdote: we are the only American BB bank with an on-the-ground presence in Belgium :)
J.P. Morgan has a fortress balance sheets, meaning that it weathers good in uncertain environments (and can continue to deliver for clients). Look at previous crisis for example.
L: Why would a foreign company go public in another country such as for example Chinese companies going to the NYSE?
JB: To be honest, a bit out of my scope, but would say following:
- Broaden / diversify investor base
- Some exchanges are more liquid than others, which means you have more freedom
- Exchanges have different regulatory and filing requirements / requirements on financial disclosure
Goodbye Trumpism
in spite of all sweat and tears, America has chosen Joe Biden as their forty sixth president. Senator Kamala Harris, the daughter of a Black father and an Indian-American mother, will make history as Biden’s Vice-President. Months of frantic electioneering, 13.9 billion dollars of campaigns spending, a raging pandemic and mass protests over race. Donald Trump, who will finish out his term as the most cynical character ever to occupy the Oval Office, was mendacious to the last, claiming victory before the ballots were counted and accusing an unknown “they” of trying to steal the election from him. He is sure to pursue his case, however misbegotten, in the courts and in the right-wing media. It would also come as no shock if he provoked civil unrest on his own behalf. If four years have proved anything about Trump, it’s that he is capable of nearly anything. There can be no overstating the magnitude of the tasks facing Biden. If he survives whatever challenges, legal and rhetorical, that Trump throws his way in the coming days and weeks, he will begin his term facing a profoundly polarized country, one even more divided and tribal than the polls have suggested. It is a nation in which one half cannot quite comprehend the other half. He also confronts a country that is suffering from an ever-worsening pandemic, an ailing economy, racial injustice, and a climate crisis that millions refuse to acknowledge. Throughout his term, Trump openly waged war on democratic institutions and deployed a politics of conspicuous cruelty, bigotry, and division. He turned the Presidency into a reality show of lurid accusation and preening self-regard. But what finally made him vulnerable to defeat was his mishandling of the coronavirus pandemic, which has killed nearly a quarter of a million Americans. His disdain for scientific and medical expertise, his refusal to endorse even the most rudimentary preventive measures against the spread of the virus, was, according to medical experts, responsible for the needless deaths of tens of thousands.
To Biden, loss, and the recovery from loss, is the very condition of life. As a young man, he suffered the deaths of a daughter and his first wife in a car crash; more recently, his elder son died of brain cancer. Biden is a man of transparent flaws — regrettable political decisions during his long Senate career, a speaking style that often tips into bewildered verbosity — and yet in his public life he rarely fails to project a quality of empathy. That quality may have been as essential to his appeal as any policy proposal. But, even if Trump’s career in elective politics is over, Trumpism will, in some form, persist. In 2016, he recognized the hollowness of the Republican establishment and quickly buried front-runners for the G.O.P.’s nomination, from Jeb Bush to Marco Rubio. As President, he made the Party his own, bending former opponents to his will and banishing anyone who questioned his authority, his judgment, or his sanity. Republican leaders made it plain that they were willing to ignore Trump’s antics and abuse so long as they got what they wanted: the appointment of right-wing judges and diminished tax rates for corporations and the wealthy. His appeal was nearly as frightening to Republicans in Congress as it was to those who voted for Biden. Trump has lost this race, but it is hard to describe the election as a wholesale repudiation. Tens of millions of Americans either endorsed his curdled illiberalism, his politics of resentment and bigotry, or were at least willing to countenance it for one reason or another. The future of Trumpism remains an open question.
L: On that note,
See you next week,
Laurent
PS: we got picked up by a major medium publication called “The Innovation”. I will be publishing my stories there from now on!
