A practitioner’s tale: Direct listings vs. SPACs

SPACs, or special purpose acquisition companies, are popular structures at this phase of the market cycle in 2020. Often called “blank check companies,” such entities may have no organic operations at the outset and are generally structured to absorb acquisitions or to be merged with another company, utilizing the proceeds of the SPAC’s initial public offering (IPO).

In this article, we examine the differences between a SPAC, a standard IPO and a direct listing — all slightly different approaches to “going public.” Given that a global total of 241 initial public offerings has been recorded so far during the second half of 2020, according to financial data provider Refintiv, I was pleased to connect with Ira W. Miller for this recent interview to highlight a highly active market.

Miller is the chairman and CEO of Zone Capital Partners, a firm that provides small and mid-cap companies with in-house consulting services to help them facilitate direct listings on popular exchanges. Zone Capital’s process utilizes robust internal legal and accounting teams as well as the appropriate transfer agents and/or broker dealer relationships. Continued business development and analysis of other opportunities post-IPO may also be facilitated by Zone as well.

Since its inception in 2008, Zone Capital has represented in excess of $1 billion in aggregate market capitalization to the financial services community.

Vailakis: Welcome, Ira. Thank you for agreeing to share your insights with Alternatives Watch readers.

Please describe the current state of the IPO market.

Miller: Thank you for having me, Nancy.

The IPO market hasn’t been this hot in decades. From a sector perspective, it can be explained quite simply: software, software and more software.

Bentley Systems, JFrog and Snowflake recently went public. Snowflake in particular is a good example of IPO pricing inefficiency. This was yet another IPO that ended up leaving a lot of investor capital on the table. What turned out to be the largest software IPO in history was priced at $120 a share before ultimately reaching $245, a difference of $125 a share.

Vailakis: What is the current state of the SPAC market?

Miller:
2019 activity started us off, but 2020 has been the year of the SPAC, which is an IPO formed when a company is merged into a blank check company and listed on a major exchange. DraftKings, listed on the NASDAQ, was the most successful SPAC, currently with an over $21.5 billion market capitalization. The next most successful SPAC was Virgin Galactic, with a current market capitalization of over $4.5 billion on the NYSE. Opendoor is the next NYSE SPAC listing; it’s an online real estate company that is expected to have a $4.8 billion market valuation.

At a higher level, we’re seeing very heavy fees being garnered by the investment bankers facilitating such deals, and we prefer the direct listing approach now that the process has been simplified and streamlined.

Vailakis: Please speak to what you’re seeing in the direct listing market.

Miller:
The direct listing market is the most appropriate market for our efforts.

For one thing, it’s less expensive for our clients. Direct listings create immediate liquidity for shareholders of the subject company. 100% of the NYSE listings at the end of September were direct listings.

Vailakis: Please provide a fuller comparison of SPACs vs. standard IPOs vs. direct listings. Cost aside, why do you strongly prefer direct listings? What are some of the benefits and downsides to each approach to going public?

Miller:
The NYSE and the NASDAQ have loosened regulations for companies to direct list, as a result of increased recent SPAC and standard IPO activity.

Lower costs, already noted, and a shorter time to market are the primary benefits of direct listings, and there are fewer to no intermediaries involved. Companies are listing shares directly without outside capital or additional dilution. There is no lockup for shareholders. Palantir and Asana just completed NYSE direct listings. We expect this trend to continue.

Further, the current rules and regulations make it prohibitive for an OTC (over-the-counter) company with a significant market value to obtain liquidity. This will add to uplistings, which occur when an OTC company moves on to the NYSE or the NASDAQ, another market that we expect to accelerate.

Standard IPOs have roadshows beforehand to garner market interest. Direct listings must be high growth enterprises with brand recognition that can be successful and still attract purchasers in an IPO scenario, while foregoing such a roadshow effort.

In contrast, SPACs generally take longer to execute than direct listings or uplistings. SPACs are tailor made for this market because of the pandemic and anticipated increases in M&A and corporate default activity. SPACs have created significant dollar volume, but I question the true level of wealth created across the board when you merge with a blank check company. Succinctly put, you need a strong lead company in a SPAC deal, because of the inherent risk in its structure.

Vailakis: Shifting gears a bit, please tell us more about your extracurricular activities, namely the socially responsible investment course you developed for NYU and your UCLA Economic Board engagement. How do such initiatives inform or enhance your work at Zone Capital (and vice versa)?

Miller:
I simply enjoy making a positive impact by leading young entrepreneurs to think bigger, as they approach their own entrepreneurial contributions and found their own ventures.

We carry over this philosophy of paying it forward at Zone Capital Partners, LLC with our internship program developed by Christopher Hunt, our Managing Director in New York. Today we have interns from Georgetown, Johns Hopkins, NYU, Purdue, Stanford and Tulane. I am proud of this program. We learn as much from our interns as they do from us!

Vailakis: Thank you for sharing your current thoughts with the AW community, Ira.

Miller:
Thanks again for having me, Nancy.

Nancy Vailakis

Nancy Vailakis is a 16 year veteran of the alternative asset management industry, having held prior investor relations roles at Cerberus Capital Management and BlueMountain Capital Management. Vailakis holds an MBA in Finance from the NYU Stern School of Business.

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