Here's why the biggest unicorns in the world are taking on billions in debtJune 17, 2016 View comments (7)
Combined, they’re privately valued at around $120 billion and have raised in the neighborhood of $25 billion during their lifespans. They're some of the fastest-growing companies in the world and also the most disruptive to legacy industries (see: lawsuits filed against Uber by taxi companies and Airbnb by governments receiving taxes from hotel sales). Airbnb has become interchangeable with vacation rentals, just as Uber equals “ridesharing” for many in the U.S.—and with Didi Chuxing having an 87% market share in China, it’s a fair assumption that it's synonymous with ridesharing in that country, as well.
First, some background:
- Uber has been in a constant state of raising for approximately three years, and just last month it raised $3.5 billion in equity from Saudi Arabia’s Public Investment Fund. The company is valued at $66.6 billion and has focused its recent capital assaults on China, where rival Didi holds a huge market share. Reports came out on Tuesday that Uber was raising an up to $2 billion leveraged loan, and had hired the likes of Morgan Stanley and Barclays to help in the process.
- Didi Chuxing (fka Didi Kuaidi, and before that the pre-merged companies of Didi Kuaidi and Didi Dache) has raised $10 billion+ in funding, not including capital raised by Didi Kuaidi and Didi Dache before their February 2015 merger. The company, though several billion off of Uber’s pace, is valued at $28 billion after receiving a $4.5 billion equity investment headlined by Apple (NASDAQ: AAPL), which provided $1 billion. Didi also secured a $2.5 billion syndicated loan financing from China Merchants Bank and China Life.
- Airbnb, the world’s highest-valued short-term rental marketplace, has reportedly just raised a $1 billion debt financing that was led by J.P. Morgan, Citigroup, Bank of America and Morgan Stanley. The financing comes after Airbnb raised a Series E round late last year that totaled almost $1.6 billion and generated a valuation of $25.5 billion.
1. They can’t continue to finance their growth solely on equity
All three of these companies have massive valuations. Airbnb’s might be less than half of Uber’s, but it's still the second most valuable private company in the U.S. right now. It would make sense to go public, yet issuing more equity may be unfeasible, given the dwindling number of large investors that haven’t already put up a big sum. Asking existing investors to contribute even more from their funds might not be received with open arms, and selling more equity would dilute existing stakes of shareholders—an event that would surely ruffle feathers given a lack of liquidity options.
One could argue that these large companies should adjust their cap structure, and introducing cheap debt will bring down the weighted average cost of capital rate, especially when many investors may be looking for returns of 10% or more.
All of these companies, especially Uber, are likely very mindful of the 2,000 accredited investor threshold for remaining completely private. Once that threshold is crossed, the companies will need to disclose their financials to the public anyway, so taking on new investors in an equity round will only move these companies closer to publicly displaying that information. If you were wondering why Uber took on a $3.5 billion equity investment from just one investor (Saudi Arabia’s Public Investment Fund), and gave up a board seat in the process, this could be an answer.
2. Debt might not be as cheap for long
Current interest rates make raising debt enticing for these companies, allowing them to capitalize on low rates for cheaper debt. Raising now will also set them up for if/when they need to issue again. Paying down or refinancing the loan in a reasonable time period will put them in good credit standing and make it easier to negotiate a lower interest rate next time, which is especially important given the probability that the U.S. Federal Reserve will raise interest rates over the next year-plus. Good credit and a low interest rate can go a long way when a company is raising a multibillion-dollar loan.
The corporate bond market in China is much riskier than in the U.S. at the moment, but the reasons for Didi to raise debt now likely mirror those of Uber and Airbnb. It will just take more scrutiny from banks before a transaction is completed.
3. An IPO is no way to go right now
Each of these companies has held a tight grip on their growth and spend metrics, even raising money without giving many details out to investors. An IPO would make these numbers public, airing out the company’s (possible) staggering losses incurred during their quest for market growth. With the public markets being a risky bet for all companies recently, looking for investors to make a big gamble on a company with questionable financials and an already monster valuation isn’t the best way to raise money. Twilio will be the first VC-backed tech company this year to go public in the U.S. if it prices next week, as expected. And even with a valuation of just over $1 billion, the company’s predicted price range doesn’t signal a huge value gain. In fact, with a midpoint pricing, Twilio's market cap will be just $40 million higher than the valuation from its most recent private financing.
All three of the companies have been linked with possible mega-IPOs for some time. Uber’s CEO stated, “I’m going to make sure it happens as late as possible,” when asked about his company’s IPO plans. Didi is said to be exploring a possible IPO in 2017, though much will depend on its market battle with Uber in China. Airbnb was seen as a possible IPO candidate for 2016, though its CEO has said, "We will do it at a time when it benefits the company, when we have a good reason," signaling that the company will not be pushed to the public markets any time soon.
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Uber, Didi and Airbnb are the embodiment of disruption, each taking hold of their market and causing panic from the stalwarts in their industry, but that hasn't come without a need for deep pockets. It’s doubtful that any of these companies could be acquired, so until they find the right time for an IPO, there will be a need for capital, and it will likely continue to come from debt packages.
(Correction: A previous version of this article was updated on June 20 to correct the limit on accredited investors)