Airbnb is checking out of private company status next year. Brian Chesky, co-founder of Airbnb, made his intention, of going public by 2018, today at the Economic Club in New York City. Airbnb doesn’t need more cash, having been profitable since the second half of last year. With an asset-light and toll-taking business model, investors should be asking: what type of equity will Airbnb sell?
Brian Chesky said that the…“only reason to go public is to give investors immediate liquidity”. A public offering will essentially open the door on liquidity and give early investors some place for selling their shares. In this respect, Airbnb is similar to Snap: an IPO not so much for cash for the business, but liquidity for venture capitalists, hedge funds, sovereign wealth funds, and others.
When there is an initial public offering, will Airbnb retain control and issue dual-class shares like Facebook or Google? Or will Airbnb follow Snap and issue only non-voting shares, which have caused a raucous among large institutional investors. Non-voting shares have been characterized as a master limited partnership (MLP), commonly used by public private equity firms.
As the general partner, management retains all the control and makes all the decisions in the master limited partnership. In exchange for having no say in management, the limited partners escape legal liability, but also get to share in the income of the partnership. It was the MLP that allowed private equities firms – Blackstone, KKR, and Carlyle – to IPO over the past ten years and avoid severe tax consequences.
Institutional investors view selling stock to the public as an exchange of money for votes. For Airbnb, the trade could just be selling stock so the public gets a piece of the action, but no control. Airbnb investors would need be satisfied only with share appreciation and dividends; this is the trade Snap made earlier this month.
China’s sovereign wealth fund, China Investment Corporation (CIC), participated on Airbnb’s most recent funding round.
It’s a move reminiscent of the Saudi Arabia Public Investment Fund’s $3.5 billion investment in Uber last year. Beyond financial gain for the Kingdom, Saudi Arabia also gets mobility solutions and employment opportunities for its citizens. Uber, on the other side, is able to expand into another part of the world, especially an emerging one.
Airbnb acknowledged China’s growth potential by establishing working relationships with China Broadband Capital and Sequoia China in 2015. Since then, Airbnb set up its China subsidiary and last fall, was reportedly in discussions to purchase Airbnb clone, Xiaozhu. Now with the CIC investment, Airbnb could be getting help from the Chinese government, besides just funding.
Reading through the book, Powerhouse: The Untold Story of Hollywood’s Creative Artists Agency, provides one with insights into the potential public offering of AirBnb and Uber. Covering the short life of Creative Artist Agency, Powerhouse tells its story with interviews of stars, agents, producers, and private equity co-founders.
TPG is the private equity firm which invested in CAA over the past ten years and that story is told in the later chapter of the book. Author, Jim Miller, interviews TPG co-founders David Bonderman and Jim Coulter who share their views on different topics, including going public.
“There are two misconceptions I often run into regarding private equity. The first is when we go into an investment, we have a plan for how long it will be before we exit. That’s absolutely not true. The second misconception is we have a three-to five-year holding period, which is definitely not the case.”
“The advantages of being public are that is can be easier to raise capital; it gives you a currency if you wish to make acquisitions or provide incentives for people you want to come join your firm. It also interferes with your privacy, so there are plusses and minuses.”
David Bonderman and Jim Coulter words should carry authority and importance in the world of tech. TPG is part of the new money following into tech in the form of growth capital. Unicorn and AirBnB were recipients of money from TPG’s Growth Fund II. In 2015, TPG closed Growth Fund III with $3 billion.