Liquidity

Inside GreenSky’s Upcoming IPO

Late last week, GreenSky filed to go public. The firm, primarily backed by private equity, isn’t a household name. However, its scale, growth, and net income make it a notable firm and an even more interesting IPO.

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If it floats, GreenSky will join a host of other companies going public in 2018, a year that may make up for a slow technology IPO climate over the past few years.

So what is GreenSky, how did it come to be, who is backing it, and what is it worth?

What Is GreenSky?

GreenSky is a financial services company that offers quick loans to people seeking home improvement work. Instead of individuals putting home improvements on a credit card, or paying cash, GreenSky offers loans of up to $55,000 from a mobile application in “seconds,” per its website.

The company allows providers of contract work, like remodeling and installing solar panels, to offer another payment option to their customers. The whole affair works from an iOS or Android device, meaning that the service provider can likely complete the financing work at the customer’s place residence. So it’s a fast, complete loop to offer five-figure financing to qualifying customers.

The company is hardly the first to try to bring technology to lending (LendingClub), consumer credit (Affirm), or home-related financing (Rocket Mortgage). But GreenSky’s focus on a single slice of the lending market (home improvement) is notable, as is its positioning between service providers and end-consumers. In its S-1 (more on the document shortly), GreenSky notes under “Growth Opportunities” that it may “Expand into New Industry Verticals.” I bet.

Notably, GreenSky doesn’t hold a bunch of consumer debt, as its S-1 notes under the heading “Asset-Light Model:”

Our Bank Partners originate and own the loans that they facilitate through our platform. We derive a substantial majority of our revenue and profitability from upfront transaction fees every time a merchant facilitates a transaction and receives a payment using our platform.

Not bad.

From Birth To Nine Figures

According to Crunchbase, GreenSky was born in 2006, making it older than I expected. The firm is based in Atlanta—the U.S.’ payments hub—putting it far from Silicon Valley. That’s perhaps why we haven’t read that much about it.

The firm has raised an astounding amount of cash: $350 million in known equity funding over two rounds. The company raised $300 million in 2014 from a group of private equity firms that included a venture capital player ICONIQ Capital. That round valued GreenSky at $2 billion, post-money.

Another $50 million found its way into the firm in 2015, entirely from Fifth Third Bancorp. That capital was raised at a $3.6 billion pre-money valuation or a $3.65 billion post-money valuation.

If that feels frothy, don’t worry; it sounds frothy to us as well. To get a grip on this massive valuation, let’s turn to its S-1.

Inside The IPO

What caught our eye about GreenSky isn’t its neat market placement, but it’s performance.

The company, unlike nearly every other tech and tech-powered IPO we have seen in recent months, makes money—gobs of it.

Sadly, before we dive into the firm’s revenue and profit, we have to work a bit to understand the company’s changing corporate structure. I apologize in advance, but let’s work out what that far-right column is all about.

Boring Stuff

Now, there are some empty rows on the right side of that image relating to the GreenSky Inc., which deal with internal business structure changes that the firm is undergoing. Let’s quickly work to understand them.

In the briefest of terms, GreenSky was formerly an LLC (GSLLC, to be precise). Last August, per the S-1, “equity holders of GSLLC exchanged their equity interests in GSLLC for equity interests in GS Holdings in proportion to their existing ownership interests.” Why? To create GS Holdings, which is a “holding company for GSLLC.” That’s fine.

But we’re not done yet. To go public, the company is creating GreenSky Inc, which will “function as the ultimate parent and publicly-traded entity” and the “corporate holding company” of GS Holdings. So why create another company to hold the holding company that the original LLC is part of?

The reason is simple, as it turns out. GreenSky is undergoing the last transformation as “U.S. tax law generally makes it impractical for a limited liability company that is taxed as a partnership to sell membership interests publicly,” per its filing. And, as GS Holdings is an LLC, GreenSky Inc. will be the final corporate parent as a non-LLC.

Last thing before we dive into the performance numbers: there are vast tracts of this S-1 that are not filled in. Critically, the “Unaudited Pro Forma Consolidated Financial Information” section will detail the historical performance of GreenSky Inc (the company that is being built out of the old company, GS Holdings) in order to go public. So we’ll have to come back when the company’s next S-1 comes out.

For now, we’ll treat the GS Holdings results as the operating results for the final holding company.

Growth, Profit

So how well is GreenSky doing to date? It is doing well, with regular profits and growing revenue.

From 2016 to 2017, GreenSky grew its aggregate revenue from $263.9 million to $325.9 million, which works out to about 23.5 percent growth. Now, at that revenue mark, its growth pace isn’t the world’s most impressive. For example, Box, a company that we constantly coerce into serving as an industry benchmark, has over a half billion in trailing revenue and a growth rate of 28 percent in its most recent quarter.

But what GreenSky has that other companies its scale often lack is material GAAP profit. Indeed, the firm generated $138.7 million in GAAP net income in 2017, up from $124.5 million in 2016 and $76.2 million in 2015.

(How does GreenSky have such attractive net margins? Incredibly low operating costs. The firm’s 2017 “compensation and benefits” line item coupled to its separate “Sales and marketing” expense only sum to $56.8 million. From a revenue base of nearly $326 million, that’s impressive.)

GreenSky’s profit growth is likely attractive to a certain class of investors. However, if public market dollars that often chase faster, less-profitable growth (in the short-term) will be attracted to GreenSky’s shares will be interesting to watch.

Those same profits also mean that GreenSky isn’t hurting for cash. The company is accreting cash to its own accounts, seeing its unrestricted cash rise from $185.2 million at the end of 2016 to $224.6 million at the end of 2017. That means that the firm isn’t likely going public to raise cash to fund operations.

Closing for today, GreenSky has just a $100 million figure written down for its proposed offering range. That’s a placeholder figure, but companies intending to raise lots more than $100 million often put $1 billion down. It will be revealed later if that means that the firm will only offer a smidge of equity in its IPO. For now, the IPO isn’t looking to set raise records.

More when we get a price range and can run early valuation calculations.

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