Having previously been courted to list on the London Stock Exchange (LSE), fintech firm Wise - formerly Transferwise - announced its intention to float its shares in the City on June 17.
Unusually, however, the firm will not be doing so via an initial public offering (IPO). Instead, Wise looks set to be the first technology firm to have a direct listing on the LSE. It intends to publish a registration document today related to the admission.
“Wise is used to challenging convention, and this listing is no exception,” says Kristo Käärmann, CEO and co-founder of Wise. “A direct listing allows us a cheaper and more transparent way to broaden Wise’s ownership, aligned with our mission.”
A direct listing differs from an IPO in that it involves the selling of existing shares to investors rather than issuing new ones. Consequently, the goal of direct listing is not raising new capital; rather it is to gain the other benefits of being a public-listed company (e.g. better liquidity).
See also: Kick-starting the IPO market
Indeed, Wise’s stated reason for the direct listing is not so much to raise capital but instead to give customers an opportunity to own a part of the company. Following its listing, it tends to start a customer shareholder programme OwnWise. It is open to eligible UK customers from June 17 and will gradually be opened up to customers from other selected jurisdictions.
“Bringing in the people we serve as owners of Wise is something I’ve long wanted to do. Recently, we welcomed our first customer owners by gifting shares to a group of 1,800 active customers,” says CEO Kristo Käärmann.
Wise believes that customers should have the opportunity to be shareholders as “strongest understanding of the problems we’re solving”. Wise believes that it is only natural that they be given a say in how it is “built and run”.
While there was speculation that Wise would list in New York instead, Käärmann cites the familiarity of London, where its HQ is based, as the firm’s main reason for listing there.
“The UK is our home — the tech sector continues to prosper and we have more than 500 people based here. We think the UK is a great place for tech and platform businesses to grow and flourish, with savvy investors who appreciate our products,” he tells the media.
The direct listing process is cheaper and quicker as no underwriters are involved. In an IPO, an investment bank underwrites the new stocks; they buy them in bulk and then sell them on. In a direct listing, the firm takes greater responsibility in selling the stocks, saving on underwriting fees. This, claims CFO Matt Briers, will allow the firm to pass cost savings onto customers.
Beware of volatility
But without guaranteed demand from underwriters, stock prices are often initially more volatile than is the case for an IPO due to a lack of price support. The “greenshoe” option is not available, where underwriters can sell more shares than planned if demand is particularly high to stabilise prices.
Yet ironically, this is precisely why Wise considers the process to be fairer than an IPO. Without intermediaries like investment banks driving sales, says Briers, the price of the stock can be decided purely by market forces without “artificial restrictions”. “The price will be the price set by the market and not anybody else,” he declares.
Despite eschewing underwriters, Wise has made sure that it has engaged the best investment banks to guide the direct listing should it take place. Goldman Sachs, Morgan Stanley and Barclays are its lead financial advisors, while Citigroup has been named as co-adviser.
Wth firms needing financial robustness to undertake a direct listing, Wise looks to be in a robust financial position for such a process. The firm has seen rapid growth of free cash flow from GBP13.3 million ($24.8 million) in FY2019 ended March to GBP 51 million in 2020, which then doubled to GBP103.9 in FY2021.
Despite the Covid-19 pandemic, the firm has seen a volume CAGR of 42% and a revenue CAGR of 54% from FY2019 to FY2021, reaching GBP421 million in FY2021. Adjusted EBITDA reached GBP 109 million with a margin of 25.8%, with profit before tax more than doubling relative to FY2020 to GBP 41 million. Wise has been profitable since 2017.
While the impact of Covid-19 remains uncertain, Wise sees revenues growing in the medium-term at a CAGR of over 20%. Adjusted EBITDA margin is seen to remain above 20%. Revenue growth is projected to come in the “low to mid-twenties on a percentage basis” in FY2022.
“97.5% of people's international payments are still flowing through banks and other providers, where fees are nearly always hidden. The experience is slow, broken and it’s just as bad for businesses,” says Käärmann. “I welcome more people and institutions joining us as owners of Wise, to build a new, better way for money to move without borders.”
