IPOs and SPACs and direct listings, oh my
This week, gaming business Roblox disclosed that it'd be pursuing a direct listing instead of the IPO that it had previously been planning late last year.
At the same time, fintech startup SoFi (which was previously said to have been contemplating an IPO) announced that it'd be going public by merging with a SPAC controlled by Social Capital.
IPO alternatives like SPACs and direct listings are undoubtedly gaining steam, and we believe this trend will continue to persist in 2021 as it did in 2020.
But what is the actual difference between all these alternative approaches, and what does it mean for investors?
In short, these differing methods simply allow companies to optimize for different types of corporate priorities - whether that be fees, speed, or liquidity.
Companies looking for the most reliable listing process would do best to opt for an IPO. When a company IPOs, it hires an investment bank to help distribute its shares to an attractive shareholder base before its shares go public, which can help prevent embarrassing early price flops.
Companies who want to minimize fees would do well explore direct listings. In direct listings, companies float their shares directly to the public and eschew the typical marketing and liquidity services of an investment bank.
Companies who just want to go public simply and quickly tend to choose SPACs. SPACs are publicly-traded "blank check" companies designed to acquire private companies so that they can go public with a fraction of the regulatory burden.
In 2021, we expect the rise of IPO alternatives to be a popular theme in financial and business media. We may even see them achieve "buzzword" status as businesses and onlookers latch on the hottest new trend.
But for the outside investor, it's important to keep in mind that these are just listing methodologies as opposed to magical indicators of performance or fundamentals.
For the typical investor, what should matter the most at the end of the day remains the same - quality, fundamentals, and valuation.
