Podcast Summary
Growth in Non-Bank Financial Companies: Despite banking sector challenges, non-bank financial companies like exchanges and index providers have thrived, with some experiencing over 300% growth. New ways of going public, such as SPACs and direct listings, add intrigue to equity capital markets.
While the banking sector as a whole has faced challenges in the last decade, not all financial companies have struggled. In fact, some non-bank financial companies, such as exchanges and index providers, have experienced significant growth. The last decade has seen phenomenal runs for these types of businesses, with companies like ICE, the parent company of the New York Stock Exchange, up 300%. Additionally, the year 2020 brought about new ways of going public, such as SPACs and direct listings, making equity capital markets an interesting area to watch. Today, we'll be discussing this topic further with John Tuttle, Vice Chairman of the New York Stock Exchange. He brings 14 years of experience to the table and valuable insights into the world of exchanges. Despite the challenges faced by the banking sector, it's essential to remember that different parts of Wall Street are thriving. Investing involves risk, including possible loss of principal.
Busiest months for new equity issuance in over a decade: August and September 2021 saw a surge in new equity issuance, with companies opting for either IPOs or direct listings for access to public markets and potential benefits like efficient pricing and liquidity.
The capital markets are experiencing a surge of activity, with August and September 2021 being the busiest months in over a decade for new equity issuance, including IPOs and direct listings. While IPOs have been the traditional route to the public markets, direct listings are gaining popularity as a new pathway, with companies like Spotify, Slack, Palantir, and Asana choosing this option in recent years. A direct listing allows companies to go public without raising new capital, instead relying on existing shareholders to sell their shares directly to the public. This can result in more efficient pricing and less dislocation compared to the IPO process. Companies may choose a direct listing for various reasons, including liquidity, credibility, and the ability to use their stock for mergers and acquisitions. Overall, the capital markets are open for business, and both IPOs and direct listings provide unique benefits for companies at different stages of their growth.
New ways to go public: Direct Listings vs IPOs: Companies like Spotify, Slack, Palantir, and Asana have opted for direct listings instead of traditional IPOs for entering the public market without raising capital and relying on the NYSE's market model and their interactions with investors.
The landscape for going public has evolved, with companies like Spotify, Slack, Palantir, and Asana opting for direct listings instead of traditional IPOs. These companies didn't need to raise capital at the time of their listing and sought a new way to enter the public market. Direct listings don't involve underwritten offerings or shares being sold to the public, instead relying on the NYSE's market model and the company's interactions with investors. The roadshow, where banks introduce a company to prospective investors, is changing due to new tools like video conferencing and teleconferencing. The IPO process has faced criticisms for years, but the recent conversation around direct listings and Special Purpose Acquisition Companies (SPACs) is driven by a pent-up demand for new pathways to the public markets that are more tailored to a company's objectives. Companies that want certainty of execution and a more controlled public entrance can consider the SPAC route.
Combining direct listings and capital raises: The SEC's approval of direct listings with capital raises offers companies efficient pricing, larger public float, and improved liquidity, addressing criticisms of traditional IPOs and benefiting both companies and investors.
The capital markets landscape is evolving, offering companies more routes to go public and innovative ways to manage lockup periods. The SEC's approval of the combination of direct listings and capital raises is a significant development, as it allows companies to raise funds while still benefiting from the larger public float and efficient pricing seen in direct listings. This innovation addresses criticisms of limited supply and control in traditional IPOs, leading to more liquidity and efficient pricing. Companies like Spotify, Slack, and Palantir have already demonstrated the success of this approach, with their opening trades ranking among the largest in US capital markets history. This trend is expected to open up the public markets to even more companies, particularly those in high-demand sectors, and improve the overall experience for investors.
NYSE proposes new rule for companies raising capital in direct listings: The NYSE proposes a new rule for companies going public via direct listings to raise primary capital at market price during opening auction, shifting from investment bank-set prices and providing potential benefits like narrower spreads and less volatility.
The New York Stock Exchange (NYSE) is proposing a new rule change to allow companies pursuing a direct listing to raise primary capital at the market price during the opening auction. This is a shift from the traditional IPO process where the price is set by investment banks, which can sometimes result in a dislocation between the set price and the market value. Companies going public through a direct listing will still need to file a registration statement with the SEC and comply with the NYSE's listing requirements and ongoing regulations. The NYSE's market model, which incentivizes market participants to quote in a company's security and requires designated market makers to set the best quote and have an obligation to layer interest, results in stocks trading with narrow spreads, less volatility, and more depth in the order book, ultimately helping lower a company's cost of capital. Critics argue that the direct listing process may lack certain protections for new investors, but companies are still subject to SEC regulations and the ongoing regulations of the NYSE.
Designated market makers ensure market quality and investor confidence in a direct listing: In a direct listing, designated market makers provide market quality, certainty of execution, and investor confidence, unlike traditional IPOs where underwriters and stabilization agents are involved.
In a direct listing, having a designated market maker plays a crucial role in providing market quality, certainty of execution, and investor confidence, unlike in a traditional IPO where underwriters and stabilization agents are involved. In a direct listing, the allocation process is more democratized, allowing anyone to buy into the shares on the first day of trading, as long as the company meets the distribution requirements. While banks still have a role in a direct listing, they serve as financial advisors instead of underwriters or stabilization agents.
Determining the Reference Price for a Direct Listing: In a direct listing, a reference price is set the night before trading begins, allowing companies flexibility to include or exclude a lockup period.
In a direct listing, unlike a traditional IPO, there is no established IPO price before trading begins. Instead, a reference price is determined the night before by consulting with the company's financial advisor and the New York Stock Exchange. Companies have the flexibility to choose whether to include a lockup period or not, as Palantir did in its direct listing. The NYSE operates as a self-regulatory organization with an independent regulatory function to eliminate conflicts of interest and ensure compliance with SEC and NYSE regulations. Despite the potential competition with investment banks, there is no reported tension or conflict between the NYSE and banks, as companies continue to list on the exchange.
Direct listings change relationships between companies, banks, and investors: Banks have embraced direct listings as a way to build long-term relationships with clients, while investors focus on long-term positions despite less allocation in early offerings.
The direct listing process has shifted the dynamics between companies, banks, and investors. While there was initial resistance from banks due to unfamiliarity and different economics compared to traditional IPOs, they have since embraced this new pathway to the public market as a way to build long-term relationships with their clients. The investor clients, on the other hand, may not be getting the same level of allocation in early IPOs, but high-quality, long-term investors are not deterred from investing in direct listings. Many of these investors already hold private positions in the companies and are focused on building long-term positions based on their convictions. The small percentage of the company floated in recent tech IPOs also means that the pop on the security may not significantly impact their overall portfolio performance. The true value of a direct listing lies in the immediate availability of a larger float and true price discovery, which can lead to a more accurate representation of the market price for the shares.
Institutional investors prefer direct listings for larger positions and less market impact: Direct listings allow institutional investors to build larger positions with less market impact, increasing liquidity and eliminating the need for hedge fund allocations.
Direct listings offer institutional investors the ability to build larger positions in companies more quickly and with less impact on share prices compared to traditional IPOs. This is due to the limited supply of shares in the market during a direct listing. Institutional investors generally prefer this process, as it increases liquidity and eliminates the need to allocate shares to hedge funds for liquidity purposes. The number of direct listings is expected to increase, making it a significant part of the market in the future. Despite this, the fees and revenue model for exchanges like the New York Stock Exchange are not significantly different between direct listings and traditional IPOs. The SEC's approval of the direct listing with capital raising proposal is reasonably confident, as the SEC has prioritized capital formation and innovation in the capital markets.
Direct listings vs. traditional IPOs: A new pathway to the public markets: Direct listings offer a more efficient pricing method for companies compared to traditional IPOs, and the SEC is reviewing a new approach that could disrupt the traditional IPO process, leading to potential changes in the IPO process and exciting opportunities for companies seeking growth capital, especially during economic downturns.
Direct listings offer companies a more efficient pricing method compared to traditional IPOs, and this new approach is gaining popularity among industry participants. The SEC is currently reviewing the petition for approval of this new pathway to the public markets, which could potentially disrupt the traditional IPO process. Some believe that banks might respond by altering the IPO process itself to remain competitive. Regardless, it's an exciting time for companies looking to access capital for growth, especially during economic downturns. The debate between banks and exchanges over the most efficient and effective methods for companies to go public is just beginning. Additionally, the concept of regulatory arbitrage and the role of network effects in creating value for central infrastructure players in various industries is an important consideration in this discussion.
The Importance of Following Through: Fully commit to a decision or subject before moving on, and communicate effectively to avoid misunderstandings and hurt feelings.
Key takeaway from this episode of the Odd Lots podcast is that it's important to fully commit to a decision or subject before moving on. The conversation between the hosts and their guest touched on the importance of following through and not leaving things hanging. The metaphor of chicken was used to illustrate this point, encouraging listeners to "sauté down to Popeyes and get a new honey" (a new flavor of chicken) only when they're truly ready to make a change. The hosts also emphasized the importance of communication and following up on discussions to avoid misunderstandings and hurt feelings. Overall, the episode underscored the value of being thoughtful and intentional in our actions and conversations.
