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Going public is something that we’ve looked at here a few times before. Some brokers can probably never do it because they are so in the grey area that they wouldn’t be able to. Others may struggle to do so for various other reasons.
But for those that are listed already, life isn’t always easy. Or at least they probably don’t get have the valuations that they’d like. Looking at the three major listed brokers today, they are all currently trading at about 7x earnings on a TTM basis. This is basically the norm for them.
That is obviously annoying if you work at one of these companies and are getting shares as some form of compensation. It’s also annoying for shareholders because they don’t necessarily see a great return on their investment.
However, deep this for a second. Lower valuations could be beneficial for firms. This may sound strange but put on your tinfoil hat and consider this.
Let’s say you are a listed company today. From what I saw recently, Plus500 senior executives are getting paid a few mil per year + probably stock options. Plus500 shares may not be worth as much as they could (should?) be, but then I doubt these guys are struggling very much. Plus I even think capital gains on buy backs are tax free if you are in Israel, so…hmmm.
Anyway, the point is that it may be annoying for various reasons that the share price is not as high as it could be but it’s also not that annoying because, if you are a senior exec, you are already minted and getting paid loads every year.
Now imagine a broker that does want to go public and the executives there go to an investment bank. The investment bank guys go around and they come back saying that they can raise at value £x, which is equal to 6x – 7x earnings.
Would you bother going public at that valuation? Probably not. If you think of listing as essentially a way to grow your business, with the downside being that you are giving away a level of equity in return, then there might not be much attraction in doing so.
To flesh that out a bit, let’s say that you are growing at a healthy clip. Within three years you think you will be able to increase net profit by 50% and then double it within five years. Someone who can be bothered to do the maths here can work out the discount rate etc for this but the point is that, if you were going to achieve this, going public at 6x earnings would be a terrible deal for you and absolutey not worth it.
This ties into the slightly conspiratorial angle we’ve taken above, which is that if you are looking to go public, then people are likely to look at similar firms and draw the conclusion that you should be valued in a similar way.
Assuming that happens, it means the lower valuations of listed brokers effectively act as a strong reason for other brokers not to go public. And the knock on effect is that then reduces competition.
If you think back a couple of years ago, eToro was supposed to list via a SPAC at around $10bn. The terms of that deal did not mean they were getting $10bn but they would have got a lot of cash to invest in the business.
Assuming they invested the money they raised wisely, then that presumably would have impacted the companies that are already listed. Because they didn’t list that didn’t happen. Then you have to think of other benefits that you get from being a listed company beyond simply raising funds at IPO. For example, IG Group currently has access to a huge credit facility. It’s plausible some companies could get something similar but I would seriously doubt any of them would get the sort of access or terms that a listed player can.
You also have less tangible things, like branding. All the listed players can show off that they are a publicly traded company and then prospective clients can look at them and go, ‘oh wow, they trade on the London Stock Exchange, they must be great’.
Is this a real thing? Maybe not by design but very possibly in practice.
Capital.com owns shares.com
Interesting things are happening at Capital.com.
One thing I didn’t realise is that they own shares.com. When we spoke to recently departed CEO Peter Hetherington earlier this year, he said the company would be launching cash equities again in the future – it seems fair to infer this is what that is for.
Another interesting thing that happened at Capital.com recently is that their Head of Product Strategy, Tim Plummer left the company. Plummer appears to have set up an affiliate review website called Broker Scanner.