The 100 Silicon Valley companies who gathered at the Palace Hotel in San Francisco this week faced one big question: How to attract blue-chip mutual fund investors but avoid an initial public offering?
In more than five hours of presentations, dozens of venture capital firms, investment bankers and lawyers on Tuesday addressed all the technical issues around direct listings, an alternative to IPOs that releases existing shares to public market bidders without raising any new capital.
Leading Silicon Valley investors, such as Benchmark’s Bill Gurley and Sequoia Capital’s Michael Moritz, argue bankers systematically underprice IPOs, resulting in companies raising less money than they could.
But there were plenty of questions about the impact of direct listings on another powerful group: fund managers such as Fidelity, BlackRock and T Rowe Price that typically represent the largest long-term buyers when companies come to the public markets.
The investment bankers who previously portrayed IPOs as a border wall under their exclusive control have heard that this barrier has been breached and is starting to crumble
Michael Moritz, Sequoia Capital
Manny Medina, chief executive of the $1.1bn software start-up Outreach, said “chatter in the room” at the event focused on how direct listings cost companies control of their shareholder register.
Traditional IPOs come after roadshows where executives can market their offerings to targeted investors, resulting in bankers building a book of initial buyers.
“My dream is to have a very small amount of large shareholders that are patient, committed and see the vision and are with me for the long term,” Mr Medina said. “So if you go the direct listing route, you lose that ability. If you go the IPO route, you capture that ability but you get mispriced.”
Mr Medina, who said he supported direct listings, acknowledged that IPOs are not the only way to attract the big asset managers.
T Rowe Price, for example, took part in the final private fundraising held by the messaging company Slack before it went public and was the largest holder of the company’s stock following its direct listing, with shares valued at more than $1bn at the end of the second quarter, according to regulatory filings compiled by William Blair.
Attendees at the conference included representatives from the multibillion-dollar private start-ups DoorDash, GitLab and Unity, according to people who were in the audience, suggesting that there could be more momentum behind direct listings. Airbnb, the home rental company, is leaning towards a direct listing when it comes to market next year, people briefed on the company’s plans said.
Direct listings remove the role banks play in hand-selecting investors and directly allocate shares to the highest bidders. Proponents have argued the open market process results in a more diverse, committed group of shareholders.
Some supporters of direct listings have even accused large fund managers of working with bankers to lower IPO prices, in the hope of creating profitable first-day “trading pops”.
But critics note the two largest companies that have carried out direct listings, Slack and the music streaming service Spotify, are both trading below their opening prices, suggesting some impatience from their investors.
Conference organisers attempted to address the concerns about the open market process. On one panel, a trio of investors – Brad Gerstner, who invests in both private and public companies, hedge fund manager Brandon Haley and Wellington Management’s Michael Carmen – expressed support for direct listings and said they may prefer them in some cases, according to people who attended the session.
“People are too focused on the big names – Fidelity, T Rowe, BlackRock,” said one conference speaker, who was not on the panel. “You’ve got to broaden out relationships and build real buy-side support. Otherwise it just doesn’t work.”
In response to questions about direct listings, Fidelity said it evaluated companies on a “case-by-case basis”. BlackRock and T Rowe Price declined to comment, and Wellington did not respond to a request for comment.
Backers of direct listings also said the process results in participation from fewer hedge funds, which they characterised as the quintessential short-term investor, in the IPO just for the first-day pop. Hedge funds can be favoured by banks, though, because they pay some of the highest banking commissions.
Hedge funds made up 85 per cent less of Slack’s investor base than comparable software company IPOs, according to an analysis by William Blair, which called the data “a stinging indictment of the typical IPO pricing and allocation process”.
“I’d wager that [the conference] was an eye-opening experience for the majority of attendees and that the investment bankers who previously portrayed IPOs as a border wall under their exclusive control have heard that this barrier has been breached and is starting to crumble,” Mr Moritz told the Financial Times.
Nicole Quinn, an investor at Lightspeed Venture Partners, said some attendees came away interested in direct listings but wanted more details about the process. She said she would discuss a direct listing with her portfolio companies but would not force them to consider it as an alternative to IPOs.
“Companies used to have to IPO at a certain point and now they have multiple options”, such as remaining private longer or undergoing a direct listing, Mrs Quinn said. “It gives them greater flexibility to have these options and do what’s right for them.”
Additional reporting by Richard Henderson in New York