In the first half of 2021, record highs were reached at a global level in raising funds through IPO. According to Baker Mckenzie, there are 246.28 billion euros worldwide, driven by the American market where there have been operations of more than 134 billion euros.
A Public Offer of Sale (IPO) is the most common way to go public. It is a process in which the company normally issues new shares seeking financing for its growth plans, although it can also be the current shareholders who sell part of their shares. The company hires one or more investment banks, who are responsible for publicizing the company and its business model among investors, ensuring placement and, preferably, allocating shares among those institutional investors whose profile best matches the company's growth plan. In exchange, they charge a commission of between 3% and 5% of the value of the funds raised.
Faced with optimism at the beginning of the financial year, 145 million new funds were raised in Spain in the first half of the year. There have been a series of failed expectations, mainly in the renewable energy sector or the most recent example of PrimaFrio. These cancellations have reopened the debate as to whether the IPO is the most appropriate mechanism for accessing capital markets, due to the uncertainty of its final result, its cost and the long term of execution time. Added to this debate is the fact that the Spanish market does not have instruments that speed up IPO, such as the famous SPACS, or they have a very limited use, such as the so-called Direct listing, used by Linea Directa, which is actually a spin-off of something that was already listed within Bankinter.
The debate has reopened as to whether the OPV is the most appropriate mechanism for accessing the market.
Listing on the stock exchange can also be achieved through a private placement with a group of qualified investors, with less liquidity and visibility or through the so-called Direct listing. The latter is a process by which the shareholders of a private company offer existing shares, directly to the general public, seeking liquidity for their investment.
El Direct listing, has numerous advantages for the company's initial shareholders. It is a more agile, faster and cheaper alternative than a traditional IPO, by reducing costs and intermediaries, eliminating the role of an insurance bank. The traditional IPO discount that insurance banks ask for from the company and which benefits the investors to whom these banks allocate shares is also eliminated. No type of Book Building and subsequent share award process. All potential shareholders, whether institutional, Hedge Funds or minorities have access to buy the shares at the same time. It is the force of supply and demand that will determine the price of the company and the volume of shares being sold. This auction may initially produce larger price fluctuations. On the other hand, if it is a pure auction, it gives rise to greater liquidity of the stock, as a higher percentage is placed on the stock market, compared to the increasingly lower percentage of capital that is placed in the IPO. Another advantage of this process is that there is no so-called Lock-up period, that period of time after an IPO in which initial shareholders cannot sell more shares. Normally a Direct listing it does not involve the issuance of new shares, which avoids the dilution of the first shareholders.
Usually limited to Direct listing to smaller companies, access to the market of names such as Spotify (4.7 billion dollars), Coinbase (5,800) or Wise (11,000) has demonstrated that this formula is also valid for large capitalization firms. Whether you choose the path of the OPV or the Direct listing, at the end of the process, the company joins a public market. From that moment on, it is subject to market information and transparency rules. In the Direct listing, the company will need to be very proactive in its communication with the market to capture, maintain and expand investor interest.
Whether through an IPO, a SPAC or a Direct listing, entrepreneurs who create and develop companies, have more and more formulas with which to crystallize the value they have created and obtain liquidity for their projects.
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Francisco Blanco Bermúdez
Founding partner of Sigma Rocket
