It’s easy to be Wise after the event. It can also be lucrative.
Wise surged to a more than £8bn valuation on Wednesday following its landmark direct listing on the London Stock Exchange, which secured the billionaire status of its co-founders Kristo Kaarmann and Taavet Hinrikus. Estonia’s richest citizens have ceded little to reach the milestone: a dual-class ownership structure means they can remain in effective control of the currency dealer for the next five years.
Scrutiny of Wise’s lopsided ownership has at times been overshadowed by the novelty of its direct listing. In truth, the two themes are interlinked. Taking an unorthodox route to market meant Wise could talk of customer enfranchisement while picking and choosing between corporate governance standards. The sidelining of institutional investors made it easier to define its own float terms then let the market set whatever risk discount it judged necessary.
None, it turned out. A debut day closing price of 880p a share meant Wise’s headline value was more than double that of its last private fundraise a year ago. All this for a total cost of £13m, which is about half the fixed fee paid by Deliveroo for its disaster IPO in March. There’s a useful precedent here for other founder-led businesses that want to cash out rather than cash up.
Joining the market without a share sale meant bypassing much of the rigmarole investment banks require to find buyers for new issues. Wise live-streamed its question-and-answer sessions and published reams of presentational bumf. Though a City roadshow ran in the background, the communications strategy was to address customer-shareholders whose ownership perks include “limited edition Wise swag” and a chance to win a trip to its annual conference.
It all played into Wise’s “nothing to hide” marketing spin. In return, the market has awarded Wise an enterprise value of around 50 times forward ebitda. That’s well ahead of the European payments sector average, even though revenue and profitability targets set out in Wise’s prospectus are towards the lower end of the peer group. During an ecommerce and consolidation-driven gold rush among payments companies there’s nothing particularly notable about Wise’s 20 per cent long-term targets for annual revenue growth and ebitda margins.
And with scale come the usual problems whenever fintech entrepreneurs seek to invent things that already exist.
Wise began as a peer-to-peer currency matchmaker but struggled to match flows, so grew to resemble a traditional broker. Losses from its trading desk and currency moves in the customer’s favour combined to absorb almost 10 per cent of its transaction revenues last year.
Traditional brokers take trading risks and maximise commissions wherever they can. Wise is hindered by its desire to win friends. Operating in a market with very low barriers to entry, it tacitly concedes that there’s nothing much to compete over other than price.
Then there’s the problem of locating profitable growth. Few people outside migrant and jet-set communities need currency services regularly so expansion requires some invention. Deposit taking, corporate accounts and bank partnerships have already been added as Wise seeks ways to find more active customers, more than 40 per cent of whom use the service less than once a year.
Wise’s desire to disrupt currency transfer appears sincere. “Our mission is to reduce our fees to zero,” the prospectus warns, then goes on to describe a business that relies on fees for the vast majority of its income. Reckless sincerity is tricky to value. Add in an ownership structure that allows the pursuit of grand visions ahead of fiduciary duties and it all adds up to a challenging investment case.
It’s understandable that when planning a float Wise wanted to speak first to its customers. The company’s cheap and quick money transfers have won a sizeable fan base. Choosing the easy options on control and corporate governance make Wise a tougher sell for the City, however, which has long shown a preference for businesses that are willing to make enemies of customers when it means higher shareholder returns.