IPO

As Palantir and Asana revive direct listings, will others follow?

September 29, 2020
Asana and Palantir will make their public debuts on the New York Stock Exchange this week. (Eduardo Munoz Alvarez/Getty Images)

Asana and Palantir Technologies are set to kick off a pair of direct listings on Wednesday, renewing buzz around the IPO alternative not seen since workplace messaging provider Slack went that route last year.

Many companies this year have eschewed the traditional IPO path, mainly through reverse mergers with blank-check companies. The New York Stock Exchange listings from enterprise software maker Asana and Palantir, the data analytics company co-founded by billionaire Peter Thiel, will provide rare test cases for a host of buzzworthy startups on the cusp of going public. Their success or failure could further reshape the IPO market by normalizing the direct listing.

Previous direct listings from companies like Spotify and Slack benefited from broad name recognition at the time of their deals. But industry watchers point out that direct listings pose a major hurdle for some companies that lack that kind of cachet: educating investors about their business.

"Some of the less successful direct listings that we've seen are ones without an established brand," said Boris Dolgonos, a partner at law firm Gibson Dunn. "They don't create a lot of investor interest."

In traditional IPOs, underwriters typically generate interest by initiating analyst coverage of the company, organizing roadshows where bankers present to potential new investors, and lining up big-name shareholders.

Unlike Spotify or Slack, Palantir and Asana arguably lack that type of brand awareness. Spotify had reached 159 million monthly active users before its IPO. And Slack, with more than 10 million daily active users, saw its name transform into a verb in many corporate offices.

Asana, which did not disclose daily active users, reported that 3.2 million users had activated free accounts since its inception. Palantir, which primarily contracts with large government institutions or corporations, had just 125 customers in the first half of this year.

"Palantir is a slow-growth company and Asana is not exactly a household name, so I suspect that there will be some sense that, if these guys can do it, then we can too," explained David Golden, a managing partner at venture capital firm Revolution.

The pandemic and ensuing market volatility also scuttled some companies' plans for direct listings this year, said Ran Ben-Tzur, a partner at law firm Fenwick & West, who works with companies on IPOs and direct listings. "I think a lot of companies that were pursuing a direct listing switched to a traditional IPO."

For instance, vacation rental giant Airbnb had been expected to pursue a direct listing at the start of the year, but has since reportedly shifted those plans in favor of a standard IPO.

The company filed confidentially for an IPO in August and is motivated to go public this year due to employee stock options that are reportedly set to start expiring in November. While Airbnb saw its bookings—and in turn, revenue—plunge earlier this year as a result of pandemic lockdown orders, the company has since rebounded faster than leading hotel brands, according to consumer spending data from Edison Trends.

Because so few companies have opted for a direct listing, several questions remain over how best to execute one.

One point of contention is lockup agreements—provisions that prevent existing investors from selling their shares for a specified period after an initial public offering. Direct listings usually don't have lockups, which is one reason why the format appeals to venture capital investors.

Palantir has broken from that model by imposing lockups in its direct listing. That gives retail investors more assurance that insiders won't sell their shares immediately after the company goes public.

"Maybe the Palantir model is a good one for a lockup structure," said Ben-Tzur. "My sense on lockups is it's going to be a fairly bespoke structure until someone figures out the 'standard' for these direct listings."

The direct listings will also give CEOs a taste of how accurate secondary markets are at pricing private company shares, Golden pointed out.

Although Palantir was valued at $20.3 billion in early 2016, according to PitchBook data, its shares have reportedly traded on secondary markets at prices that suggest a valuation of just $10.5 billion. But the company's stock could be valued at nearly $22 billion when it starts trading, according to a report from The Wall Street Journal that cited bankers familiar with the deal.

One feature of direct listings is that a company's stock price is determined entirely by the market on the day it starts trading.

The issue of raising cash, one of the biggest private company impediments to direct listings, won't be addressed by either Asana or Palantir. Neither company is raising money in their listing, as that's forbidden under current rules—a prohibition that means direct listings tend to only favor well-capitalized businesses.

Both the NYSE and Nasdaq have proposed changes to allow companies to raise capital in a direct listing. The NYSE's rules were briefly approved by the SEC, but later stayed after they were opposed by the Council of Institutional Investors.

Revolution's Golden thinks the proposed rules could be a "game-changer" for the direct listing, as most companies pursuing an IPO do so in part to raise money. If exchanges open up direct listings to more companies, the markets will get more evidence of what works and what doesn't.

"Right now, there's a lot of interest in these direct listings but fairly few examples," Gibson Dunn's Dolgonos said. "As you have more and more examples, it will become routine. And then once that happens, I think it'll be like a domino effect."
 

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