Biggest IPO of the Year Could Be Spotify's Non-IPO
Spotify AB will soon shine a bright light on just how big the holes are in our capital markets. Far more than just bankers should take note.
Sometime, reportedly by the end of March, shares of the streaming music service will start trading for the first time. The deal, a direct listing, has received attention for some time because it's unusual. The usual pomp around stock deals will be absent -- no road show, no quiet period, no coordinated stock sale, no actual IPO. Spotify shares will just emerge one morning and trade like any other stock, at least that's the plan.
It might not work out that way. The shares could plunge, soar, or soar and then plunge, or plunge and soar, or not trade at all because of a mismatch between buyers and sellers. This obviously matters to bankers, who normally lead stock market listings like this and charge high fees for doing so, particularly for IPOs. But if Spotify shares can smoothly transition to public from private markets on their own, it could create a new model for growth companies in which they raise all their money in private markets and do all their trading in public ones, with some small variations. (Spotify is slightly unusual because it has positive cash flow and doesn't need to raise more money.) Banker bonuses be damned.
And that's where the markets have been trending. Facebook Inc.'s. botched IPO created momentum to change the rule that limited the number of investors private companies could have. Activist hedge funds and the short-term quarterly accounting of public markets turned off big-thinking entrepreneurs. Tech unicorns emerged. Uber Technologies Inc. has thousands of investors and a liquid-enough market in its shares that ousted CEO Travis Kalanick was able to sell a third, or nearly $1.3 billion, of his stake no problem, according to reports last week. And it has been able to all that without technically going public.
All of this has also led to much angst about public markets. IPOs came back last year, somewhat, but they are still down from the mid-2000s and far below what investors would expect for a booming market and economy. The Wall Street Journal wrote recently that the public markets were "shrinking before our eyes." Securities and Exchange Commission Chairman Jay Clayton has made increasing the number of IPOs his crusade, proposing, under the anti-regulatory umbrella of the Trump administration, to relax rules on them. The argument is that the average investor should get a shot at investing in these growth companies. But the effort is likely to do more to invite fraud into the public market than genuine entrepreneurs and their companies. And when they do happen, prominent IPOs -- Blue Apron Holdings Inc., for one -- have largely been flops.
But what if the current mix between private and public markets works and it's just the transition mechanism, namely the IPOs that so many want to badly revive, that is the problem? Jay Ritter, the University of Florida Business School professor who has probably done more research on the IPO market than any other academic, says a viable IPO market doesn't have to be very big. Spotify could show a new way forward, frightening bankers and giving regulators a lot to think about.
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