Axios Pro Rata: No takers (yet) for this non-IPO

Plus: Uncertainty for Chinese IPOs | Saturday, July 10, 2021

Open in app View in browser   Presented By RBC Capital Markets   Axios Pro Rata By Kia Kokalitcheva ·Jul 10, 2021 Welcome back to another Saturday! This week, we're looking at the public listing landscape. As always, feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar. Playing on my Spotify: Thelma Houston's "Don't Leave Me This Way" and Donna Summer's "On The Radio." Today's Smart Brevity™ count is 897 words, a 3-minute read.     1 big thing: The "hybrid" direct listing is here — and still waiting Illustration: Sarah Grillo/Axios   Nobody wants to be the guinea pig. Regulators approved a new process for "hybrid" listings back in December — but no company has yet taken this route. Specifically, the SEC said companies can make direct listings with a primary capital raise on the NYSE. It subsequently approved such listings on the Nasdaq in May. Why it matters: The new listing format was hailed as a solution for companies that want the benefits of a direct listing and need to raise new capital. The big picture: Since December, four companies have gone public via the classic direct listing: Roblox, Coinbase, ZipRecruiter, and Squarespace. For comparison, only three did in all of 2020, and three in 2018 and 2019 combined. Between the lines: The devil's always in the details — and those still need to be ironed for hybrids. The first mover will face a laborious SEC process that's sure to take much longer than the established methods. For context, Spotify completed the first-ever direct listing, in 2018, and it put in several more months with regulators than it would have taken with an IPO. What they're saying: "It's a structure that's fascinating on paper ... and exceptionally difficult to figure out what company this would be for," says Lise Buyer, founder of IPO consulting firm Class V Group. IPO experts and top bankers still have questions around pricing and Regulation M, among other things. Pricing: Under the NYSE rules, issuers would have to price within the range they set — or refile. This could prove tricky and add delays that companies would prefer to avoid, and it's unclear if the SEC would be willing to allow them to set a wider range than the usual 20% top-to-bottom range. Reg M: While Spotify was able to get a no-action letter from the SEC for how it planned to ensure that the company and its advisors wouldn't manipulate the price, it's unclear how an issuer and its underwriters would do so in hybrids — or what the SEC will bless. Meanwhile: Companies using the IPO route have increasingly been able to customize in ways that rival what they'd get from a direct listing — like shorter employee lockup periods. Unity, Airbnb and DoorDash, which all went public last fall, used a new system for an auction-like price setting process. Recall that price discovery was among the top arguments touted by direct listing advocates. And those who wanted to raise fresh capital and conduct a direct listing simply raised a private funding round prior to going public. Yes, but: Insiders are optimistic that it's only a matter of time before a company makes the jump. It'll be one that won't mind the protracted timeline, and more likely when the SEC is less stretched with more urgent matters. (This may turn out to be wishful thinking if the commission's agenda remains jam-packed.) The bottom line: The hybrid listing so far has been more of a solution in search of a problem.     2. Uncertainty for Chinese IPOs Illustration: Aïda Amer/Axios   Beijing is going after a financial engineering technique that allows some local companies to tap foreign capital markets. It's part of Beijing's move to tighten its grip on domestic companies — a goal embodied in its treatment of ride-hailing giant Didi over the last few weeks. Why it matters: Chinese companies are facing more regulatory challenges at home — but regaining the confidence of spooked American and other foreign investors could be their biggest test. Driving the news: Beijing is reportedly considering closing a loophole in its laws that's allowed companies in certain sectors that are normally barred from taking foreign investment to tap into the U.S. capital pool by going public stateside. The so-called "variable interest entities" structure allows Chinese companies to set up a shell company in, say, the Cayman Islands. Foreign investors then buy shares of the shell company. Beijing is reportedly looking at requiring regulatory review of companies that use this structure before they go public in Hong Kong or the U.S., according to Bloomberg. It could also apply to public companies seeking to issue new shares. State of play: Didi has made the splashiest headlines this week for Beijing's backlash after its IPO — but there are already other ripple effects. Medical data company LinkDoc was supposed to price its IPO on Thursday but has postponed. And fitness app Keep just pulled its planned IPO altogether. The bottom line: The pipeline of Chinese companies going public in the U.S. has been growing over the past couple of years. But that trend is now in limbo.     3. What to watch Illustration: Sarah Grillo/Axios   The U.S. and global IPO markets had their biggest quarters in more than 10 and 20 years, respectively, and Q3 is poised to be another strong one. Here are some of the largest upcoming global IPOs, per Renaissance Capital: Syngenta (Shanghai): $10 billion estimated deal size Krafton (Korea): $4.5 billion estimated deal size Universal Music Group (Amsterdam): $3 billion estimated deal size Paytm (NSE India): $3 billion estimated deal size Raízen Energia (B3 Brazil): $2.65 billion estimated deal size     A message from RBC Capital Markets What influences consolidation in the comms infrastructure sector?     70-80% of the growth in the communications infrastructure sector has been driven by a handful of hyperscale companies. What this means: There's a push towards consolidation — as the industry evolves eventually it will get down to a smaller number of players. Find out more.     📚 Due Diligence A quick pulse check on direct listings (Future) China vs. capitalism (Axios) Spotify case study: Structuring and executing a direct listing (Harvard Law)     🧩 Trivia Companies and their bankers and advisers have experimented with the public listing process long before the last few years. Question: Which Big Tech company went public via a not-so-smooth Dutch auction in the early 2000s? (Answer at the bottom.)     🧮 Final Numbers Data: Renaissance Capital; Chart: Will Chase/Axios     A message from RBC Capital Markets There's significant private capital looking for bargains     Private capital is considering some of the traditional sectors that have not performed well during the pandemic. What this means: Investors are seeking value investments to be well-positioned in a post-COVID marketplace. Get more details.   🙏 Thanks for reading! See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and favorite IPO bankers to sign up. Trivia answer: Google, in 2004. Like this email style and format? Learn more about Axios HQ. It'll help you deliver employee communications more effectively.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Suite 1300, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: