Morning Markets: Why go public when you can just hold a nine-figure secondary sale instead?
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It’s a wild year. Financings of a quarter-billion dollars or more abound, Uber stumbled while going public, Zoom and Beyond Meat and Pinterest did not, the markets are hot, crypto is trending up, and Slack is racing towards a direct listing. It’s a lot of fun to watch, frankly.
But amidst the current IPO run, a race to get public from companies we expected and some we did not, there’s still unicorn hijinks to keep tabs on. You see, while many companies are looking to go public in the current liquidity cycle, others are pursuing less conventional methods of selling shares without taking on the mantle of being a public company.
- Allows TransferWise to provide liquidity to existing shareholders;
- Allows TransferWise to hold off on an IPO if it so desires.
How? It’s simple. An IPO turns a firm’s illiquid stock into a liquid security (pending lock-up periods and the like). This is a desirable result for investors, founders, and employees alike. And, it can help the firm make acquisitions as its equity is now priced more fairly and is easier to spend.
But if you want to get most of that done and avoid going public, you can just hold a big secondary sale. A secondary sale, unlike vending new shares, doesn’t generate new capital for the firm in question. Instead, it allows folks who already own stock in the company to offload some or all of their holdings.
Taking money off the table through a secondary — especially as a large secondary — was frowned upon in more conservative times. Why? It changes incentives, and makes some existing employees, perhaps, less concerned about the future value of the firm as they already cashed in some or all of their holdings.
However, such whiny, nerdy concerns are not very 2019. Indeed, in 2019 a $292 million secondary sale from unicorn TransferWise, a firm that repriced in the deal to a higher $3.5 billion valuation, will quickly fall into the background. It won’t make much of a splash. You will forget about this deal by tomorrow morning, even though it’s a big, meaningful event.
Here’s TechCrunch on the transaction:
In a call, TransferWise co-founder and Chairman Taavet Hinrikus told me the round was oversubscribed, too. The arbitrary figure of $292 million was simply the result of how much liquidity existing shareholders were willing to make available, and nowhere near the upper level of interest.
Some existing investors bought more shares. Per TechCrunch’s Steve O’Hear, “growth capital investors Lead Edge Capital, Lone Pine Capital and Vitruvian Partners” led the financing event.
TransferWise can afford the secondary sale as it has had a good run of fundraising. Indeed, the firm’s November 2017 Series E brought in $280 million to the company at a post-money valuation of just under $1.6 billion.
If that sum of money — close in size to the $292 million secondary trade — sounds like an IPO-scale haul, that’s because it is. Indeed, TransferWise has effectively gone public, in two parts, while private. First, in 2017 it raised an IPO-scale check with its Series E, and now with its huge secondary sale, the firm is providing lots of liquidity. Just like an IPO.
While money is cheap, expect more of this sort of thing. In time, we’ll get closer to the historical norms of liquidity. But we’re a long, long ways off from that day.
The company emailed Crunchbase News a list of metrics along with the news of the sale. Aside from its whimsical claim that “the company has raised $689 million in primary and secondary funding” which felt like an odd use of the word “raise,” here are the interesting bits:
- In its fiscal year ending March 2018, TransferWise had revenue of around $148 million and “net profit” of $7.8 million using current currency conversions.
- Turning to more recent metrics, the firm claims “5 million customers worldwide, processing £4bn every month.”
This helps understand why everyone wants into TransferWise. Unicorns which are profitable and growing quickly are the real unicorns. By that I mean that they are actually rare. Unicorns are not.
Unicorns that are quickly growing while generating net income? Those remind us of some other companies that did really well. Perhaps you recall how Facebook and Microsoft and Apple and Alphabet were all growing and profitable when they went public?
Illustration: Li-Anne Dias.