Monthly Archives: October 2021

For decades, the process that private companies in the United States have used to get listed on public markets has followed a familiar script, using bankers as intermediaries to price and sell their offerings, primarily to preferred clients. As the number of public offerings has surged in the last few years, there have also been disruptions at three levels.

• The first is in the types of companies going public, with many firms entering the public markets with large losses and unformed business models. For much of the twentieth century, the prototype for a private company that was going public was that of a small, growing company, with a working business model, making or on the verge of making profits, and a need for capital that exceeded what venture capitalists could offer. The median going-public company has become larger (in terms of revenues, in constant dollar terms) and less profitable; only 20% of firms that went public between 2016 and 2020 were making money, in contrast to the 80% of firms that went public between 1980 and 1990.
• The second is in process that a private company follows to go public, for the last few decades, has been built around bankers as intermediaries. The traditional IPO process takes too long, costs too much, and leaves both issuing companies and investors dissatisfied, the former because the process takes too long and is too inefficient, and the latter because they feel that only a select few can partake at the offer price. One alternative is direct listings, where the company dispenses with the banking services (setting an offering price and roadshows) and lets the market set the price on the offering date. This process, by reducing the need for banking intermediaries, is less costly but it still takes time and comes with constraints, especially in the context of raising capital from the offering to cover future business needs. A special purpose acquisition company (SPAC) offers a different approach to going public, with an initial listing of an entity that raises public, with the intent of merging with a private business that wants to be in the public markets. The sponsors of the SPAC are the key players in this game, since investors in the entity are dependent upon the sponsors finding a target and negotiating a good deal. While SPACS may be more time efficient, and SPAC sponsors get a little more leeway than conventional IPOs in disclosure and marketing, the sponsor’s substantial slice of capital (20% or higher) is large enough to wipe out any potential timing and pricing benefits in the deal, making them often the only winners in this process.

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