“The only two places where spreads haven’t narrowed in the last 20 years is houses and IPOs,” Colas said, referring to the fees bankers earn on these deals. “From the venture capital standpoint, I don’t know this trading is going to change their minds a whole lot, because they still see that 7% spread.”
Direct listings may be working as designed by their private investors, but they’ve left public investors flummoxed on more than one occasion. Scrutiny of reference prices—a figure provided on the first day of trading as guidance—surround each debut, and have contributed to wild price swings.
When the press articles tomorrow say “Coinbase pops 40pct above reference price!!!” remember that the reference price is 100pct useless and was set artificially low so that headlines would say exactly this. Very silly.
—Thomas Farley (@ThomasFarley) April 14, 2021
“The process around setting a reference price is probably something that needs to be looked at more closely,” MKM Partners analyst Rohit Kulkarni said in an interview. “Simply because there is no clear and hard evidence of what appetite investors have prior to the setting of the reference price—very much unlike the book building process in an IPO.”
With much less historical data available than for IPOs, traders then have trouble with basic questions such as when to enter their position.
“The market is still trying to figure direct listings out,” University of Florida finance professor Jay Ritter said in an interview. “The opening price has been higher than the closing price with most of them. I don’t expect that to continue, because the people who are buying at the open are going to say, ‘Well if there’s a predicable price decline during the day, why should I buy at the open instead of the afternoon?’”
Bumpy Path
To some, the volatility and uncertainty are a small trade-off for a more democratic way to go public that doesn’t let investment bankers award shares to preferred clients at a discount. But cracks are emerging in that line of thinking, too. Coinbase raised $1.25 billion in private offering of equity-linked securities one month after its listing that was designed to skip an IPO.
The stock has fallen below both its reference price of $250 and the opening trade of $381 to sit around $215 on Tuesday in New York, also weighed down by a selloff in Bitcoin.
For Coinbase Chief Financial Officer Alesia Haas, the opaque supply-demand dynamics are the hardest part of going public by direct listing.
“You’re not allowed to ask your investors what they plan to sell, and so you go in with a lot of unknowns,” Haas said at the Bloomberg Deals Summit, adding that this can create a “bumpy path” for a listing.
This article was provided by Bloomberg News.