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What’s Going on Below the (Exit) Waves w/ Morgan Stanley

What’s Going on Below the (Exit) Waves w/ Morgan Stanley

Innovations within the Market via IPO’s, Direct Listings, SPACs, and M&A’s

Currently, there has been a substantial wave of change and innovation in the tech liquidity market.  The market is changing rapidly from a resurging IPO and direct listing market to the rise of SPACs and hyper-strategic M&A moves.  Navigating these new waves in the market can be challenging, which is why we had our friends from Morgan Stanley speak to the CFO|Circle this week.  Team Morgan Stanley helped provide some context behind the robust valuations, changing strategies, and structural innovations of today’s market, and offered their advice for how emerging leaders can capitalize on these trends for future success.  

We heard from key players across the Morgan Stanley team, all with different perspectives on the market’s state today.  Paul Kwan, the West Coast Tech Banking group leader, directed the presentation and offered some important points on what company leaders should be considering as they navigate the future market.  Colin Stewart runs all of Morgan Stanley’s Capital Markets globally; he took a break from trading two brand-new Direct Listings (Palantir and Asana) that same day to give us some context on those deals and the corresponding trend.  Brittany Skoda, Global Head of Software, and Shaan Tehal, Head of FinTech, gave an overview of the latest software valuation charts. Owen O’Keefe spoke on how M & A factors in with everything else.  Here are the key takeaways from our conversation: 

5 Important Points to Consider About the Future of the Market

To frame the conversation, Paul provided five key points for emerging leaders to keep in mind regarding the overall state of the market and plans for future success, regardless of whether they are only two or even five years away from looking to go public.  

#1 – The Changing Nature of the Exit Market – “The Liquidity Game”

Between innovations to the traditional IPO structure, the recent hype around SPACs, and the rise to Direct Listings prominence, companies today have more options for going public than ever before.  To fully take advantage of the different options, the Morgan Stanley team stressed the importance of hammering out a company’s objectives to choose the option most likely to solve an issue.  Here are some of the team’s key points on what’s driving these trends, and what we might expect from the exit market in the future: 


The lock-up period is becoming more bespoke. We are seeing more IPO’s basing it on stock price with the potential of shortening the windows to 90 days instead of having the traditional 180 day IPO window. In addition, newer IPO’s are including lock-up exemptions for employee shares. As an example, Snowflake had a 90-day time-based lockup for their employees, as opposed to having to satisfy the price base. And Unity let their employees sell a small portion of their holdings in the first 15 days post-IPO before their blackout window took over.

Direct Listing

After successfully leading both the Palantir and Asana direct listings on the morning of our call, Colin Stewart took a break from the trading floor to fill in some context about the direct listing as a path to going public.  In contrast to the traditional IPO structure where a company raises capital and shares are initially allocated to investors for trading, companies in a direct listing are not raising capital. All the trades that occur come purely from the capital table (the shareholders who make up a company).  Indeed, with the direct listing, you essentially have to turn your shareholder base into traders to get the transaction to work, a process that can be incredibly challenging, depending on the size of the cap table.  However, once the shareholders have been educated, and the company has been listed, the direct listing can lead to greater trading volume and liquidity than in a traditional IPO. 

When the group questioned why a company would choose the direct listing instead of going through the traditional IPO process, Colin described how companies choosing the direct listing today generally do not need capital.  Depending on the company’s capital table’s makeup, a company may not want to take primary dilution or force its shareholders into a potentially inefficient offering process. Instead, it may feel that its shareholders should be able to do what they want to do with their shares.  Further, with reduced IPO supply in the market today, driven by companies choosing to stay private longer and/or companies being acquired, the direct listing is an opportunity to add supply into the market and provide institutional investors a chance to buy more shares at the open.  

With each subsequent direct listing that Colin and the Morgan Stanley team perform, they have “expanded the aperture” of what kinds of companies can make it happen. Thus, the direct listing figures remain topical.  While at first, Colin imagined that only larger, consumer-branded companies with significant market cap would choose the direct listing strategy. The team’s recent listings of smaller companies seem to indicate the potential expansion of the strategy.   


During our last Circle|Call, we navigated through the details of a SPAC. As a reminder, a SPAC, or Special Purpose Acquisition Company, is an alternative way for a Private Company to raise capital and access the public equity markets. A SPAC is a publicly-traded company that consists of significant funding from institutional investors but has no product or business operations, just cash sitting in a trust account. The SPAC’s role is to merge with a private company, sometimes called a target company, with a product and business operations. 

“It’s actually right now about SPACs.”

The Morgan Stanley team believes there will be a flight to higher quality teams and sponsors that will shake out amongst all the shafts. They also believe there will be a change in economics for SPACs where the compensation schemes will be far more aligned to all stakeholders.

After a few questions about when a company might choose to pursue a SPAC transaction instead of a traditional IPO or direct listing for going public, the MS team offered their perspective on SPACs in the exit market.  Indeed, with 100+ SPACs looking to get a deal done within the next two years, there is incredible demand for companies looking to go public.  Due to this high demand, choosing a SPAC may speed up the (conceptual) timeline of a company’s decision to go public; even in execution, the timeline remains quite similar to that of a traditional IPO.  It was also pointed out that in some cases, the cost of capital may not be cheaper via SPAC, and a company should have a holistic view of both kinds of the cost of capital, whether it’s an IPO or a direct listing or a SPAC.

While there was not a consensus on the typical company that decides to go public using a SPAC, the team did note that the promoter’s changing nature is changing the SPAC. With more crossover investors moving into the SPAC space, a wider range of company profiles may soon choose to go public via a SPAC, rather than just companies looking to solve a specific issue.     


The Morgan Stanley team pointed out that M&A has changed a lot where a shift from historically selling for cash has shifted to selling for stock, which they say has a more strategic outcome with more share upside and less tax leakage.

#2 – The Changing Nature of Valuation

While everyone traditionally focuses on growth versus profitability with regard to valuation, the MS team recommended companies think about optimizing the positioning of their business model to maximize valuation.  The team noted that they are now seeing premiums for companies with transactional-based models, rather than the traditional recurring revenue models. They worked to demonstrate how the sustainability of growth drives value for the company. 

Particularly Paul pointed out that what drives value in MS’s view is the sustainability of growth, not just raw growth or other metrics. And what drives the sustainability of growth is threefold: one is TAM expansion over time, the second is product footprint and platform expansion, the third is culture. They suggest optimizing and positioning your business model to get the best multiple instead of just growth versus profitability.

#3 – The Importance of Company Culture

The MS team described culture as the most important driver of long-term value creation in public companies.  Specifically, a company’s unique culture and how said company articulates that culture to potential investors drives operational advantage and, in turn, leads to shareholder value.  While the “soft, warm” topic of culture may seem not to fit with the “cool, hard” topic of company performance, the team stressed the validity of excellence of culture being a key component in achieving the right valuation. A few examples were Shopify, Coupa, and Zoom, three of the four highest valued software companies at the moment. For Zoom and Coupa, these companies included their Glassdoor ratings and their extensive writeups on company culture in the roadshow. Shopify focuses on its company’s deep product innovation culture – they talk about it and share it with the public and put real new products out consistently.

#4 – The Importance of ESG and PBCs

There has been an increase in the relevance of ESG (Environment, Social, and Governance) or ESG index in public companies recently, and the MS team strongly believes that the market will begin to value companies who are leaders in ESG accordingly.  With their commitment to making decisions based on the needs of all stakeholders (i.e., the environment, society, employees, customers, etc.) rather than the bottom line, PBCs (Public Benefit Corporations) are seeing increased interest and interaction in the market as well.  A PBC means a company will

commit to making decisions based on all stakeholders, stakeholders being environmental, social aspects, employees, customers, broader constituents, as opposed to the bottom line.  Veeva, a SAAS leader, life sciences software company valued at $40 billion, is an example of a company focusing on improving its ESG index.  They were the first public company to switch from being a Public Delaware Corporation to being a PBC, is focusing on improving their ESG index. 

#5 – The Importance of Strategic Landscape Optimization 

Different from just packaging a company for sale, strategic landscape optimization entails thinking about the potential partners and ecosystem around a company, and how different it might react to different scenarios in the rapidly changing market.  Deals can happen very quickly. Having spent time doing some planning and scenario analysis can help a company, particularly one in a cross-industry space, adequately respond to anything that might come its way.

To get a better picture of its strategic value, a company must understand the relationship between the M&A value, the IPO scarcity value, and the synergy value that it brings to the market.  For the Morgan Stanley team, the value of a business is a function of these three things, and developing a strategy around these concepts can help a company avoid selling too early and for too little.          

In summary, what we learned on our Circle|Call is that the market is in a great period of creativity, driving it all to be bespoke. There are three viable ways to go public: the direct listing, the SPAC, the IPO.  And even the traditional IPO sees a lot of innovation around things like lockups, anchor investors, and book-building.  It was suggested for companies to hammer out their objectives, as they will find they can pull elements from each of the five points to consider into an IPO, a SPAC, or a direct listing. Instead of being forced down a traditional path, a company can currently solve what they need to solve for as there is more of a ‘pick and choose’ option in the market.

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