Stock market history rarely repeats itself, but it sometimes rhymes.
In 2016, Metro Bank took the unconventional route of floating without a full public offering. Deciding there was no need to go through the costly and time-consuming IPO process, the challenger bank chose instead to step directly on to London Stock Exchange’s premium segment via introduction. New investors didn’t need to be sold the story because it could rely on long-term backers loyal to its flamboyant founder and chair, Vernon Hill.
Things didn’t go exactly to plan. Metro’s pre-float private placement fell short and the direct approach met with resistance in the City, where prospective investors complained that without a roadshow to pull apart the business model, they were unable to reach consensus on a valuation. The shares first soared, then slumped after the bank found an accounting error in its loan book and tore up its business plan. By the time Hill stepped down in 2019, Metro was about 90 per cent below the introduction price.
On the surface there are few similarities between Metro Bank and Wise, the currency transfer specialist seeking to join the London market next month. One is a fintech champion, the other an anachronism. Nevertheless, by reviving direct listings Wise has asked potential investors to revisit the same questions about transparency and accountability that the full IPO procedure would seek to answer.
Across the pond it’s a debate that already feels exhausted. Direct listings for Spotify and Slack in 2018 and 2019 respectively inspired countless editorials about how tech entrepreneurs were redefining Wall Street on their own terms. Investment banks fear-mongered about chaotic price discovery if their underwriters could not choreograph the opening exchanges. Fund managers at the big institutions grumbled privately about losing their preferential status. And yet, most US direct listings have proven no more volatile than the average float.
Everything about Wise’s float is in the Wall Street playbook. A dual-class share structure gives outsized control to co-founder and chief executive Kristo Kaarmann. Retail money is looped in under the guise of customer enfranchisement. The company talks of its float as “a fairer, cheaper and more transparent way for Wise to broaden its ownership”, which is a euphemism for winner’s curse: angel investors and start-up employees paid in stock options get itchy for an opportunity to cash out.
But Wise is not a stock that will sit easily in many UK portfolios. Initial liquidity will be tight and trading will be restricted to LSE’s standard segment, blocking entry to FTSE indices. Two-tier ownership means Kaarmann holds one vote less than a 50 per cent majority on any shareholder decision for the next five years, which raises all the same complaints about principles of fairness that helped turn Deliveroo’s April float into a disaster.
Hype around the direct listing also risks deflecting scrutiny of Wise’s business model. Kaarmann and co-founder Taavet Hinrikus built the company having tired of paying bank fees on money sent from the UK to their native Estonia. Those roots remain: much of Wise’s business is for foreigners living in the UK who cannot open bank accounts.
Being the payment company of choice among migrant worker communities has delivered explosive growth from very little marketing spend; whether it’s sustainable growth is a question awaiting an answer.
The City is cynical by default when companies take shortcuts. Holes in Metro Bank’s prospectus may not have been uncovered by a conventional IPO process, but investors who lost out are prepared to tell themselves that, given more information, they would have been smarter. It’s the same default cynicism that hinders recent attempts by regulators to dilute London’s one-share-one-vote protections and belatedly embrace special purpose acquisition vehicles. Cynicism can be a useful defence mechanism.
Wise’s float plan is notable not for its structure, but its choice of venue. It’s not an innovation, it’s an invasive species. Celebrating its imminent arrival is yet another symptom of the City’s post-Brexit crisis of confidence.