Sighing for Klarna is a waste of breath

Klarna, the Swedish interest-free consumer lender, had the paparazzi cameras flashing with its $1.4bn IPO this week, as A-list investors jostled to get through the rope and into its exclusive club of shareholders.

An IPO surrounded by razzmatazz is not the kind of thing that usually happens in Europe — and it didn’t happen in Europe. Klarna had rejected London or any other Old World exchange and gone to New York.

So far, the choice has worked out perfectly. Klarna’s was the latest in a string of New York tech IPOs this summer where the bookrunners have had to fight investors off, sometimes increasing both the deal’s size and price — and then getting a huge pop on the first day.

Klarna priced at $40 a share, above its marketed range of $35 to $37, and the shares opened 30% up.

Events like this just worsen European equity specialists’ inferiority complex. Why can’t we get glamorous tech companies to list in Europe, they grouse, and why can’t European issuers and investors learn how to make a deal swing like the Americans?

But the real contrast here is not between the US and Europe — it’s between the celebrity sensation IPO market and the workaday one.

Klarna is one of a charmed group of companies — nearly always tech firms — whose IPO is a major event, a must-have deal that investors clamour to be in.

Most companies have nothing like Klarna’s cachet or brand recognition, so have a harder time getting investors to care.

This humdrum market, however, is the one that really matters — the gateway to public investment for companies of all shapes and sizes.

The two spheres are as different as a Beverly Hills pool party and a night down the Dog & Duck pub.

There is much hand-wringing among European policymakers about why the continent’s IPO market is so patchy and weak. Waves of reports and regulatory tweaks have been launched at the problem.

Investors are generally perfectly happy to buy equity capital markets deals from listed companies — primary capital raisings, block sales of existing stock, rights issues — at sensible, often tight discounts.

But when it comes to a new, unlisted company, their knees turn to jelly. What if it turns out to be a shocker? A lipsticked pig that guzzles at the trough, then rolls over on its back before its first results?

The European equity market’s biggest problem is lack of trust in pre-IPO companies.

In that light, are deals like Klarna the goal — or part of the problem?

This may be Klarna’s first entry to a public stock exchange — after several attempts. But it has had outside investors since at least 2010, when Sequoia Capital first took a stake.

The story of its valuation is public knowledge, including a dizzying high during the 2021 tech stock boom, when a private funding round valued it at $46bn — more than Barclays. The next year, it was worth just $6.7bn.

Now, public investors have stamped a price tag of $15bn on the company — the same as Bank of Ireland.

That sounds more reasonable, but how are investors really to judge?

In the quarter to June, Klarna made a net loss of $53m and an operating loss of $46m, from revenue of $823m. Customer receivables totalled $9.95bn. It managed to declare a $29m adjusted operating profit.

Taking the average of its last two quarters, Bank of Ireland made €304m of net profit on €1bn of revenue, an 11% return on equity. Customer loans are €82bn.

But Bank of Ireland is not setting pulses racing in Wall Street, Dubai or Silicon Valley. Klarna’s growth of 20% in revenue and 30% in customers, and its promise of disrupting finance are what has got them frisky.

Klarna’s business model was new when it began. It’s still not clear interest-free credit — paid for by merchants out of their ordinary margins, and by late payment fees on customers who overspend — can become permanent. Nor that Klarna's unique selling points cannot be copied by rivals.

Expansion at that pace and continual innovation mean Klarna will not be the same company in a year’s time. Normal valuation metrics do not apply — investors have got to take its claims on trust.

Taking punts like this, they hope, is the way to catch the next Amazon. But there is a lot of risk involved. Many glitzy tech IPOs tank. Klarna’s shares are back at $43.

Deals like Klarna’s are Hollywood’s idea of an IPO. They are packed with prestige — but also with peril.

Offered these trades, investors get starstruck, lose all their inhibitions and slap a huge pile of chips on the table.

But when they contemplate a dowdy manufacturing company that has been churning out profits for decades and shows every sign of being able to do so for decades to come, with reams of data and research to back it up, they think ‘oh no, IPOs are awfully risky’.

Maybe what European IPOs need is not — as bankers, commentators and politicians dream — a few deals like Klarna.

It’s a rebrand to separate the market in investors’ minds from deals like that — a dull new name like Established Company Listing.

For most companies, seeking capital from public investors should be more like packing up their documents in a briefcase and going to ask the bank manager for a loan than competing in a beauty parade with film stars.