How to evaluate the three paths to the public markets

Entering the public markets is a transformational event for companies, so understanding your options is key.

In brief

• Traditional IPOs appeal to companies that are nearing an inflection point in their growth.
• The rise in popularity of SPACS can be attributed to their increased flexibility.
• Direct listings are rare and appeal to companies with a broad shareholder base.

Recent elevated valuations and low volatility have led many private companies to contemplate going public. Whether through a traditional initial public offering (IPO), a special purpose acquisition company (SPAC) merger or a direct listing, each path has its own set of advantages and considerations and will be transformational for a company to undertake.

Traditional IPO

A traditional IPO is often considered a tried and true path for companies wanting to go public. An IPO may be the best route for some companies to fund their growth by accessing deep pools of capital. However, an IPO is not available to every company.

IPOs have fairly well-established criteria. Traditional IPOs tend to work well for companies that have sufficient scale and are approaching an inflection point in their growth or development. It also is helpful if there are similar companies in the market so investors can benchmark you.

SPAC IPO

SPACs have been around for decades but have exploded in the last two years. For those seeking to raise capital and provide liquidity for their shareholders, SPACs may have greater capacity than IPOs for primary proceeds and secondary sales.

SPACs raise capital from investors through an IPO. Those funds are held in trust, earmarked to acquire one or more target companies. SPAC management generally has two years to find a suitable target; when they do, investors vote to accept or reject the merger. Once approved, the merger is completed, and the target private company or companies become public entities. In 2021, there were 199 companies that closed their mergers, three times the mergers closed in 2020.

The reason SPACs are growing in popularity, particularly among early-stage entrepreneurs, is they are much more flexible than a traditional IPO. Each deal is unique, heavily negotiated and tailored to both the SPAC and the target company. Sponsors are also more understanding of earlier stage companies that may not hit their stride for a number of years.

Direct listing

Direct listings are still quite rare. There have been only 12 direct listings since 2018, so pinpointing trends in that market is nearly impossible — each company is very different. In general, direct listings work best for large, mature, consumer-facing companies, where the investing public is familiar with the business. Generally, companies that choose this route have a broad shareholder base and have already addressed their funding needs.