The venture capitalist Bull Gurley published a great long read comparing the traditional IPO process with the more recent direct listing process and with Spacs or special purpose acquisition companies, of which there have been some recent high-profile examples.
I found the details of Spacs somewhat hard to follow, but the bulk of the article is readable and darkly fascinating. He describes just how inefficient the IPO process is for both the company going public and ordinary investors buying into the newly public company.
In simple terms, the intermediary investment bankers set the listing price below what they estimate its market value would be. This is so that private investors, typically clients of the investment bank, who buy into the company right before it goes public have a rise in price, and the investment bank itself, which facilitates this. This is unfair to most retail investors who now buy at the much higher market price, and to the company and its promoters, who are giving away equity to these pre-IPO investors at a price lower than what it will (shortly) command.
You are told the “optimal” target is to be 30X over-subscribed. This is not a joke. You are told that you actually need 30X more orders than you actually plan to sell. This is an explicit admission that they plan to ignore 97% of the actual orders and fill only 3%…
Now imagine you are selling any other asset, be it a piece of art, a home, a piece of software, or perhaps your car. Where would you have to price that asset to ensure that 97% of the people that considered that purchase would make an offer, and you would have 30X more demand than you need? It is truly tautological that underpricing is happening, because this flawed process is being used by each and every investment bank… it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a structurally backwards approach…
Who benefits from underpricing? Clearly the people that are handed the shares in the hand-chosen allocation process. On the IPO process the underwriters are agents for both the company and the buyside (the shareholders who are allocated shares). The IPO may stand-alone as the only very high-dollar transaction in our world where a single agent represents both sides of the transaction.