Transferwise, the Shoreditch fintech company disrupting big banks’ stranglehold over international money transfers today shook up the London financial markets with plans for a £7 billion stock market float that cuts out the City’s middlemen.
Conventionally, companies wanting to join the stock market engage brokers who set the debut price for the shares after building up orders from big City institutions.
The process can be lengthy and is more art than science, with shares sometimes collapsing when public trading begins as in the case of Deliveroo, or surging, as with Darktrace, indicating that the price for the initial investors was wrong.
Under Wise’s direct listing plan, the company simply puts all of its shares straight onto the Stock Exchange. The Exchange then holds an auction for three hours where buyers and sellers establish a price, after which the stock begins trading.
Wise founder and chief executive Kristo Kaarmann likened the move to the company’s origins in tackling poor exchange rates offered by profit-seeking banks when doing money transfers: “When we started Wise we did not think [bad] exchange rates for transferring money was fair.
“We found a way to do it without the banks and created an alternative solution.
“Here as well, we are addressing a problem and finding a more transparent, cheaper way of doing this with a direct listing.
“In finance, there is a lot of tradition in place and we maybe don’t remember why we are doing it this way.”
With no publically-stated pricing range as with a conventional IPO, there is no way of telling what Transferwise will be valued at. Some have suggested it could be as much as £9 billion, but more measured heads suggest something closer to £6 or £7 billion.
The company raised $319 million (£228 million) last July in a move that valued the business at $5 billion, but it is growing rapidly and has been making a profit for five years. This could indicate that the valuation has increased significantly since the last round of funding.
It said it was able to pursue the direct listing route because it is not raising new money.
Direct listings happen sometimes in the US but this is the first of a tech company in the UK.
City sources said there were risks associated.
In a direct listing, staff and senior managers are not locked in to keeping their shares, meaning they could sell out quickly and leave the company.
The main risk, though, is the difficulty of guessing what the price might end up as.
In an IPO process, the stockbroker can support the price by guaranteeing to buy shares, potentially smoothing out the price and preventing volatility.
The Stock Exchange today said that on Day One of Wise’s debut it would pause trading up to four times in what is called a price monitoring extension if the price swings dramatically.
A price monitoring extension, alerts the market that a lurch has happened in the hope that the signal will bring more traders in to offer a more realistic price.
If demand for the shares of a company coming to the public markets proves particularly high, in an IPO a broker can trigger what is called a “greenshoe option” where it issues more shares to satisfy those who want them. This cannot be done under a direct listing.
The IPO broker can also favour long-term shareholders to give the company more comfort that it will not simply become a plaything of short-term hedge funds.
Those risks may put off traditional investors looking to hold the shares and support the company for five or 10 years.
However, Wise is unusual for a private company because it already has several big, long term institutions as shareholders, including Baillie Gifford, Jupiter, Fidelity and BlackRock.
Kaarman said: “Every one of our employees who ever worked at Wise is a shareholder, and we recently gave shares to 2000 customers. The largest group of shareholders today are our employees.”
He acknowledged that many would sell up and move on, but was relaxed: “Sure, there is always a risk of employees leaving.”
He said Wise was only able to opt for a direct listing because unlike most companies who float, it was not seeking to raise any new money.
“We have no need to raise now but our previous fundraisings have got bigger and bigger, with the last one being hundreds of millions of dollars, bringing in new shareholders and giving existing ones liquidity [to sell].
“We have been mimicking the public markets for a few years in private but now is a time to change.
“Public markets are designed to enable this liquidity to existing owners and allow institutions, customers to invest and be part of Wise.”