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Lex Midweek Letter: tech listing mania and the PayPal Bunch

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Dear readers,

Tech companies are marching en masse to public markets through direct listings, “blank cheque” shell companies or initial public offerings.

Shares in Palantir, a data group with CIA links, and office tools provider Asana start trading on Wednesday via direct listings. These are alternatives to traditional IPOs in which no new capital is raised. 

Opendoor, the real estate tech company, and Chargepoint, one of the oldest electric vehicle infrastructure companies, have declared they will go public through a special purpose acquisition company (Spac) merger.

More conventionally, cyber security company McAfee has filed for an initial public offering. So has online clothes resale marketplace Poshmark.

The resurgent IPO mania is impressive amid economic uncertainty and a coronavirus crisis that means most deal pitches must be conducted by video meetings. Little surprise that allusions are being made to the heady days of the dotcom boom. But 2020 is unlikely to match the previous two years for listings — let alone 1999.

Column chart of IPOs in the US 1999-2019 showing Not a dotcom bubble yet

Last year, there were 159 US IPOs, according to Statista data. The year before that, there were 192. It will be hard for 2020 to catch up after a prolonged quiet period. But there is a chance that on one metric it could do better. Some of last year’s most hyped “next generation” tech stocks have performed poorly as public companies. Lyft and Uber still trade below their listing price. WeWork didn’t even make it to the starting block. Slack, which went public via a direct listing, has underperformed.

By contrast, 2020 has already chalked up a number of success stories. Earlier in September, cloud data warehousing company Snowflake went public — the largest software IPO to date. Its initial market value of more than $33bn made headlines because it was almost triple the last valuation private investors had given earlier that year. Yet even this inflated figure underestimated public demand. Snowflake’s market capitalisation is now $70bn. 

In the same week that Snowflake listed, software company JFrog joined markets at a value of about $4bn. It now trades with an equity value close to $8bn. Earlier in the year, marketing software company ZoomInfo priced its shares at $21. They now trade at just below $40 each.

These rising valuations reflect both high demand for software company services and the broader recovery of the stock market, which fell sharply in the early days of the pandemic but has since ticked back up. The S&P 500 is up 50 per cent from the low point in March and slightly up in the year to date.

What happens now? The immediate repercussion of successful tech listings is going to be more of them. Companies that have remained private for years will be watching to see how long the window stays open.

Longer term, however, there may be a fresh wave of mergers and acquisitions, investments and new companies. 

In tech, returns from successful exits (including IPOs or acquisitions) are often funnelled back into the industry. Look at Palantir. Co-founder Peter Thiel is part of the jokingly named “PayPal Mafia”. These former PayPal executives and workers went on to create or fund successful tech companies after eBay bought PayPal in 2002 for $1.5bn. 

In addition to Palantir, Mr Thiel, a former PayPal chief executive, also set up venture capital firm Founders Fund, which has backed companies including Airbnb. Reid Hoffman, former chief operating officer at PayPal, went on to co-found LinkedIn. Elon Musk, also briefly PayPal chief, joined Tesla and founded SpaceX. Another former PayPal chief operating officer, David Sacks, invested early in Airbnb and Slack. Meanwhile, three employees, Jawed Karim, Chad Hurley and Steve Chen, went on to launch YouTube. 

There may well be irrational exuberance at play in the rising valuations of tech companies. But successful listings this year could plant the seeds for the next round of tech giants.

Enjoy the rest of your week,

Elaine Moore
Deputy head of Lex



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Soho House owner files for New York flotation

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The owner of Soho House, the private members’ club, has filed for an initial public offering, as the company seeks to tap into investors’ growing interest in leisure stocks.

Membership Collective Group, which owns 28 Soho Houses worldwide among other properties and a retail brand, said on Monday that it plans to list its shares on the New York Stock Exchange under the ticker “MCG”.

The company said in a filing with the Securities and Exchange Commission that it intends to raise $100m, a figure that is often used as a place holder for calculating registration fees. It has yet to determine the number of shares it will offer or a price range for those shares.

A rebound in travel and dining demand heading into summer, bolstered by vaccinations against Covid-19, has stoked speculation that MCG will target a valuation greater than the $2bn marker set in a $100m funding round last year.

The hospitality group, backed by US billionaire Ron Burkle, said its membership numbers held steady through the pandemic. It retained 92 per cent of Soho House members in the 2020 financial year and received more than 30,000 applications for its membership brands, according to the S-1 filing.

Revenues in the first quarter of this year totalled $72m, down from $142m in the same period a year earlier. It also reported a net loss of $93m, compared with a $45m loss in 2020.



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South Korean video game group behind hit ‘PUBG’ aims for $5bn IPO

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The company behind global hit game PlayerUnknown’s Battlegrounds plans to raise up to Won5.6tn ($5bn) in an initial public offering that is expected to be South Korea’s largest ever.

Krafton said in a regulatory filing on Wednesday that it will sell more than 10m shares at Won458,000-Won557,000 each, with the top end of that range giving it a market capitalisation of Won28tn. The IPO price will be set on July 9 ahead of the company’s listing in Seoul on July 22.

The much-anticipated listing is likely to top that of Coupang, the leading South Korean ecommerce company that raised $4.6bn in New York in March.

Krafton, formerly known as Bluehole, was founded by Chang Byung-gyu in 2007. PUBG, a so-called battle royale game in which players fight to the death on a remote island, was released in 2017 and accounts for the bulk of Krafton’s revenues. The game has sold more than 75m copies across PC and consoles, while its mobile version has been downloaded more than 1bn times. Krafton’s operating profit more than doubled to Won774bn last year as sales jumped more than 50 per cent to Won1.67tn.

However, the company cited uncertainty in overseas expansion and domestic regulation as investment risks.

“Despite our successful experience in entering overseas markets, our past experience does not guarantee our future success given the different language, culture, custom and legal, regulatory environment,” Krafton said in its filing.

South Korea is on track for a record year for IPOs on huge retail investor interest. The benchmark Kospi index is trading near all-time highs, buoyed by ultra-low interest rates and the country’s strong economic recovery from Covid-19. Investment bankers have predicted that proceeds from IPOs will more than quintuple to at least Won25tn in 2021.

Other IPOs in the pipeline include LG Energy Solution, the world’s largest electric vehicle battery maker, which is expected to raise Won10tn-Won15tn in September. Hyundai Heavy Industries, a shipbuilder, is likely to raise $1bn-$1.5bn in August. Smaller deals include the IPOs of Kakao Pay and Kakao Bank, units of the country’s dominant messenger service provider.

“The Krafton IPO will be popular among investors, given investors’ growing interest in new growth areas such as EV batteries, games and online businesses,” said an investment banker close to the deal. “But the company is heavily reliant on just one game and it is uncertain how long the game’s popularity will last.”

Some analysts have raised concerns about Krafton’s high valuation based on its IPO pricing.

“Krafton’s valuation seems stretched, considering that its market cap will surpass NCSoft’s, although NCSoft is making more money than Krafton,” said a local analyst referring to one of the company’s competitors.

Krafton plans to use the IPO proceeds to develop new games, acquire other developers, enter markets including India and the Middle East and invest in technologies such as artificial intelligence.

After the IPO, Chang will hold a 14 per cent stake, followed by Chinese internet group Tencent with 13.2 per cent, according to company filings.

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Made.com valued at £775m in London IPO

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Shares in Made.com fell 8 per cent despite the company pricing them at the bottom of their range in its initial public offering on Wednesday, giving the online furniture retailer a market capitalisation of £775m.

The listing follows the recent debuts in London of online greeting card group Moonpig and vintners Virgin Wines, which have accelerated sales thanks to stay-at-home consumers buying online during the coronavirus pandemic. Both those groups’ shares remain well ahead of their IPO prices.

Deliveroo’s £7.5bn IPO was branded one of the worst In London’s history, however, after its shares — already priced at the bottom end of the range — fell as much as 30 per cent in initial dealings. They remain more than a third below their IPO price.

“It’s a bit disappointing,” said one banker not involved in the Made.com IPO, adding that the 200p a share pricing was “some way below the levels that had been talked about”.

Valuations of up to £1bn had been mooted in the run-up to the listing.

“It’s got a large addressable market and a lot of share to go for, but historically it has wrestled with achieving profitability and scale in the UK market and it has gone ahead and pushed into international markets despite that,” the banker added.

Made.com sold 50m new shares in the IPO, raising £100m, while existing investors including co-founder Ning Li and Brent Hoberman sold 46.9m shares. A further 14.5m shares could be made available as part of the overallotment option. If exercised, that would increase the number of shares to 111.5m and 29 per cent of the issued share capital.

The shares traded conditionally in London on Wednesday, while full dealings will begin on Monday.

The homewares group aims to quadruple annual sales to £1.2bn by the end of 2025. The company has said it plans to invest proceeds from the IPO in marketing and supply chain improvements aimed at reducing the time between customer orders being placed and goods being delivered.

“The IPO is an exciting milestone for Made,” said chief executive Philippe Chainieux. “A listing in London, where the business was founded, will enable us to accelerate our growth.”

Made.com generated £315m in sales last year. The group, founded by entrepreneurs Ning and Hoberman in 2010, sells to about 1.2m active customers in the UK, Germany, Switzerland, Austria, France, Belgium, Spain and the Netherlands and plans to expand beyond Europe.

After admission, growth-focused investors Level Equity and Partech will be the largest investors in the group, holding 14 and 11 per cent respectively, followed by companies linked to Ning with 8.8 per cent.

Fund management groups Majedie, Axa and NFU Mutual will also be top-10 shareholders, while a vehicle controlled by Hoberman will own 5.5 per cent.

The float is the latest in an increasingly active IPO scene for so-called digitally native businesses.

Victoria Plumbing is due to float on London’s junior market early next week, with pricing details expected on Thursday, while shares in German online fashion retailer About You began trading in Frankfurt on Wednesday and Berlin-based online optician Mister Spex announced its intention to float on Monday.



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