Palantir Technologies Inc. is expected to fetch a lofty valuation in its transition to a public company despite an unusually aggressive governance structure, in the latest sign of investors’ voracious appetite for new shares.

The data-mining-software specialist is eschewing the traditional IPO route and going public through a direct listing, in which a company floats its existing shares on a public exchange and lets the market determine the price. Ahead of a debut planned for September 30, Palantir’s bankers have told investors the shares could start trading around $10 apiece, according to people familiar with the matter. That equates to a market valuation of nearly $22 billion on a fully diluted basis.

In the private markets over the past year, Palantir’s stock has trended higher. The volume-weighted average price in August was $7.31 and in September, $9.17.

Those average prices are likely to help determine Palantir’s reference price, the guidepost to where the stock could open in a direct listing. The stock exchange publishes the price after looking at recent private-market transactions and consulting with the company’s financial advisers.

There is no guarantee Palantir shares will start trading at the expected level, and even if they do, that they’ll stay that high for long.

Peter Thiel, another of Palantir’s three co-founders


Photo:

Kiyoshi Ota/Bloomberg News

The expectation of an elevated market capitalization for Palantir is the latest sign of the unlikely surge in the IPO market, as companies scramble to issue their shares and investors gobble them up amid a struggling economy. The IPO market is running at a record pace thanks in part to surging stock prices, particularly those of technology companies.

Palantir makes software used by numerous government agencies—including tools to help track terrorism suspects—as well as businesses to help sort and analyze data.

The strong demand for the money-losing company’s stock is all the more remarkable given that its founders have put in place one of the most aggressive governance structures ever seen. The shares of Palantir’s three co-founders—billionaire investor Peter Thiel, Chief Executive Alex Karp and President Stephen Cohen—are structured so they could become more potent as the men sell down their stakes, according to securities filings. Through a unique feature of the voting structure, Mr. Cohen, for example, could still effectively control the company by owning just 0.5% of the shares.

Palantir also has an unusually long list of deals between the company and its executives, which are known as “related party transactions” and tend to make good-governance advocates groan. Palantir lent $25.9 million in 2016 to Mr. Cohen, who repaid most of the debt in August using some of his shares. Company loans to top executives aren’t permitted for public companies.

Palantir’s voting structure represents a new frontier in the push by startup founders in recent years to maintain control after they flip to public ownership—even as, in many cases, they give themselves the option to reap windfalls from selling the most of their shares.

Palantir’s structure “takes it to another level with concentrating power with the founders,” said Anita Dorett, associate program director at the Interfaith Center on Corporate Responsibility. The group has criticized some of Palantir’s work with U.S. government agencies involved with deportations, among other concerns.

Neither Palantir nor the founders had a comment on the company’s governance.

Investors had become more wary of voting structures that give founders outsize control, particularly after the high-profile botched initial public offering last year of WeWork. It fell apart largely because of its co-founder and then-CEO Adam Neumann’s outsize control and the hundreds of millions of dollars he reaped from selling his shares and other transactions with the company.

G their risk appetites have shifted, and investors now appear willing to overlook corporate-governance concerns in a race to get into hot stocks as the new-issue market is booming.

This year is shaping up to be one of the busiest years for IPOs on record, as investors leap at opportunities to invest in fast-growing technology upstarts. Issuers had taken in $95 billion from U.S.-listed IPOs through the end of Wednesday, exceeding the $84 billion raised at this point in 2000, the previous record year, according to Dealogic.

Newly public shares in many cases are soaring, rising an average of 22% on their first day of trading. That is the best average first-day performance since the tech boom. In the most recent example, data-warehousing company

Snowflake Inc.’s

shares more than doubled in their first day of trading, despite being priced well above the targeted range.

In a filing on Tuesday, Palantir gave guidance for the rest of the year, something companies are unable to do in traditional IPOs G is allowed in direct listings. For fiscal year 2020, Palantir said it anticipates revenue growth of 42% to roughly $1.1 billion.

Like many other highly valued tech companies before going public, Palantir has never made a profit. For 2019, it reported a net loss of $579.6 million, about the same as in 2018. The first half of 2020 showed improvement, with a $164 million loss compared with a $274 million deficit in the same period in 2019.

Some potential investors say that even if they find the company’s voting structure egregious, they think Palantir will keep growing and the stock will go up over time.

The structure of a direct listing typically allows existing shareholders and employees to sell most or all of their shares immediately rather than wait for the mandated lockup of 180 days in most traditional IPOs. Palantir is taking steps to limit the supply of stock on the market by only allowing existing holders to sell 20% of their shares until early next year. That scarcity could serve to bolster the stock price.

Even after a run up, Palantir’s stock could start trading around where it raised funding five years ago. Since it was founded in 2003, Palantir has raised more than $3 billion and become one of the highest-valued startups when a 2015 funding round put its valuation at $20 billion.

Write to Maureen Farrell at [email protected], Corrie Driebusch at [email protected] and Eliot Brown at [email protected]

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