November 2020

Direct Listing: Communicating Your Path to the Public Market

By Danielle Belopotosky and Kiki O’Keeffe

Innovation in equity markets is booming. The special purpose acquisition vehicle (SPAC) has stolen the spotlight this year, overtaking the traditional initial public offering (IPO) process so familiar on Wall Street. One mechanism also gaining increased attention is the direct listing.

For companies that don’t need to raise additional capital, or that have hit unicorn status, the direct listing is an attractive option that allows them to list shares with less hassle and reduced transaction costs. Direct listings, like IPOs, come with a quiet period where public statements follow strict rules –  unlike a SPAC, where messaging can remain loud throughout. During the process, there are openings to communicate, and companies going through a direct listing must seize these opportunities.

As these vehicles grow in their appeal, here are some of the communications considerations for companies going public through a direct listing.

Own the Demand Story

A company first needs to explain why it has chosen this path over the others.

Without underwriters to help market new shares, companies have to be much more proactive in telling their story in a direct listing. Bankers still play a critical function, but their role is more advisor than underwriter. Although companies will still file a prospectus and host investor days, the public narrative that will drive demand rests more heavily on management’s shoulders.

Well-capitalized companies with the resources and personnel to take on that responsibility are therefore more likely to choose the direct listing route. In the absence of a traditional IPO marketing process, these companies must build in capacity to take on this challenge to ensure that the public float will reflect a strong valuation and healthy appetite for shares.

The Volatility Factor

Direct listings come with especially high price volatility, and companies will have to contextualize potential stock swings within their longer-term growth narrative. Without the mandatory lockup period of an IPO or underwriter support for the stock post-listing, companies are pressure-testing demand with this approach.

Direct listings can be structured to address concerns around volatility, as Palantir did by imposing share restrictions to help stabilize the price after day one. The conversation around how to reimagine the IPO process has only intensified, and direct listings are innovating bespoke solutions for companies looking to tap into equity markets.

Bring Employees Along for the Journey

Going public is a major milestone in the lifecycle of any company, no matter the mechanism. While companies are often limited in what they can say before a listing, it is imperative that senior leaders take steps to inform and excite their employees about what being part of a publicly traded entity will mean for them.

As much as possible, companies should educate employees on the transition from private to public, recognize their contributions and bring them along for the journey. Employees play a key role in a company’s long-term success, and they are an important audience to keep engaged throughout the process. This will go a long way to cementing a sense of shared purpose in going from private to public.

Danielle Belopotosky is a Senior Vice President and Kiki O’Keeffe is a Vice President at Gladstone Place Partners.

This article originally appeared as part of the Financial Times’ Due Diligence US Forum’s virtual event, “Direct Listing: Does the IPO Need Reinventing?,” on November 17, 2020. The replay can be viewed here:

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