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UK's Landmark Direct Listing – One Swallow or the Start of Summer?

Overview

Earlier this month, the UK's first so-called "direct listing" of a technology company was announced: London-based money transfer Fintech company Wise intends to go public on the LSE's main market without the traditional route of an IPO process. Although the US has seen direct listings of some high profile companies such as Spotify and Slack, this is a significant move for the UK, whose government has been trying to make its markets more attractive for fast-growing tech businesses. Wise also considered Amsterdam and New York but is reported to have decided on London because of the existing infrastructure to facilitate a direct listing and its access to a global investor base. 


Although for a long time the LSE has allowed companies to be “introduced” without raising capital, introductions are usually seen only on demergers or secondary listings. A direct listing can be seen as a specialised form of introduction. Wise would be the first technology company to have a direct listing in the UK and the largest company in over two decades to come to market without being listed elsewhere or separated from a group.

What are the alternatives to a traditional IPO?

A flotation, or IPO, is the traditional means by which to come to market and be publicly traded. However, in recent months, it has become increasingly evident that there are viable alternative routes to a traditional IPO. The "special purpose acquisition company" or "SPAC" has become prominent, especially in the US, and the UK has recently consulted on changes to the Listing Rules which would allow more SPACs to list. However, evidence suggests that the SPAC phenomenon has reached its peak due to poor share price performances after recent deals and concern over disclosure standards.

A direct listing (see below), which cuts out the financial intermediaries and the bookbuilding process, provides an alternative, less costly route to market for certain companies. Roblox, the video gaming platform, recently listed on the New York Stock Exchange by way of a direct listing, and Coinbase, an American crypto-currency start-up, is planning a direct listing on Nasdaq.

A direct listing avoids some of the upheaval and expense of an IPO at a time when firms are finding it easier to raise money in private markets as well as certain post-IPO restrictions such as lock-ins which prevent existing shareholders selling their shares for a specified period of time.  However, a direct listing exposes investors to some risks that are not associated with the traditional IPO route.

How does a direct listing work?

Instead of new capital being raised and new investors being brought in, existing shares are admitted to trading on an exchange and the shares are listed.  There is no offering of shares at a set price, and the price is established on the exchange by ordinary market forces. Instead of a formal bookbuilding roadshow, the issuer usually holds investor days, at which relevant information is disseminated to a broad range of investors. Potential investors use this information, as well as the prospectus, to decide whether to invest following the listing.  As is the case for an IPO, a prospectus is required for a direct listing on the main market as shares are still being admitted to trading on a regulated market.

As there is no official pricing range, there is no way of telling what Wise will be valued at.  Some estimates have suggested it could be as much as £9 billion, but others have valued it as closer to £6 or £7 billion.

Factors to consider

Although attractive at first glance due to its lower cost and simpler route to market, a direct listing will not suit all companies and is typically more attractive to those that have already raised capital through other means and have a well-known brand familiar to a broad range of investors and consumers.  When making the choice, key factors to consider include:

  • Dilution of existing shareholders – There is no dilution to existing shareholders in a direct listing.
  • Transparency - In a direct listing, there is maximum transparency and equal access for all investors.
  • Dependence on market conditions – In a direct listing, completion of the listing is less dependent on market conditions as there is no fundraising.
  • Is there sufficient capital? – Many companies coming to market for the first time will need to raise new capital so a direct listing will not be a viable option.
  • Meeting the free float requirement? – There will be few candidates which already have the broad shareholder base needed for a direct listing. Under the Listing Rules, companies floating on the premium segment of the main market need to have 25% of their shares in "public hands" – this eligibility condition will be an impediment to many companies.
  • Lack of influence over shareholder base – whilst a traditional IPO enables the issuer to allocate shares to investors they prefer to create the optimal register upon listing, a direct listing gives the company no control and limited visibility on early development of the register.
  • Liquidity – In the absence of lock-ups, existing shareholders will be free to provide market liquidity, assuming the investor process creates buyside demand in the after-market.  Directly listed shares in the US have tended to show higher liquidity compared to similarly-sized companies that have done IPOs.
  • Timetable – The timetable for a direct listing could be dramatically shorter and there is the potential to avoid publicity for a longer period before listing than in an IPO. If research is not being published, the process will be quicker and there will be no need for a registration document.
  • Costs – Direct listings have lower fees owing to the process being shorter and there being no fundraising and therefore no underwriting fees. For the standard segment, a direct listing would be significantly cheaper than an IPO as no banks would be required.

It is important to note that all companies listed on the same segment of the main market will have the same continuing obligations going forward, regardless of their route to market.

What does the future hold?

It remains to be seen whether Wise's direct listing will kick-start a new trend, but we do not anticipate the IPO declining in popularity given its tried and tested status.

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