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Like a shape-shifting Norse god, Swedish fintech company Klarna can appear in many forms. The key question for investors ahead of the much-anticipated IPO is what it really is: a venture capital-backed technology group specializing in AI, or a company with an investment-grade credit rating? It will be important to determine whether the bank has been in business for 20 years. ;A payment processor aiming to rival Visa and Mastercard, or a subprime consumer lender?
To see why these questions matter, compare the valuations of successful retail banks to those of leading payment technology experts. Bank of America is valued at an unusual 12 times expected earnings, while most European financial institutions trade at much lower levels. Visa and Mastercard are trading at more than double that.
News that Klarna is looking for buyers for its future pipeline of “buy now, pay later” loans is a reminder that, at least for now, its underlying business is more like a financial company than a tech group.
Any deal is likely to be similar to the one struck with US hedge fund Elliott last October, with Klarna’s partners structuring it through forward flow arrangements rather than offloading their existing loan book. would agree to purchase a new short-term loan immediately. While buyers make money by purchasing interest-free loans at a small discount, Klarna still makes a small profit through the commission it receives from retailers on every transaction.
This type of forward flow agreement is prudent from Klaruna’s perspective. This should allow the company to accelerate growth in the U.S., its fastest-growing market, without putting a huge strain on its balance sheet.
Rival companies are also pursuing similar plans. Affirm signed a $4 billion forward flow deal with private equity group Sixth Street last month, while SoFi signed a $2 billion deal with Fortress Investment Group in October.
However, while Klarna is more diversified than a pure platform lender, with products such as physical credit cards and PayPal wallet-like ‘Klarna Balance’, its focus on forward flow trading suggests that the main driver of growth remains fairly simple financing. work.
One way to reflect its business mix is to trade its earnings at a moderate multiple, similar to those of Affirm and SoFi. That would make the company’s IPO valuation in the $15 billion to $20 billion range seem reasonable, but still a long way from its peak valuation of $46 billion in 2021.
Loki, the original Scandinavian shapeshifter, ended up tied to a rock in a cave. Klarna should be able to avoid traditional banking sector valuation criteria, but returning to tech sector Valhalla will be difficult.
nicolas.megaw@ft.com
