Pensionbee IPO - should you invest?

TLDR - I’m not investing just yet, but might do later

So just like Deliveroo a few weeks ago, PensionBee are now planning on going public, and thanks to PrimaryBid retail investors can also get in at the IPO price. (The deadline to apply is 20th April 2021).

Now we all know how that went with Deliveroo (the IPO price was 390p, so straight away it was down 26%, and then has slid further since). If you chose the max allocation of £1000 for the Deliveroo IPO it would now be worth £680.

For what its worth, I initially did choose £1000, but then as the negative momentum was piling up in the days leading up to the Deliveroo IPO (with funds staying away and strikes planned), I gratefully cancelled my order and watched that one from the sidelines.

Now on to the new IPO, PensionBee, where I’ve been going through their 229 page prospectus so you don’t have to.


Who are PensionBee?

They are a consumer facing pension consolidator. They have a nice snazzy website and app, and will help you pull together all of your old pensions in one pot, and be able to track how it is performing, choose which style of investing you want etc.

Being able to see the investments you hold and how they are performing shouldn’t be a radical product, but in the very slow moving world of pensions, this is a lot better than some of the existing providers.

I’ve recently consolidated my pensions from previous jobs using PensionBee, and the product is definitely great. Just being a nice, clean, modern interface is already a stepup, and they deal with a lot of the hassle of transferring from your old pensions. As people change jobs many more times nowadays than they used to, we are all left with fragments of pensions lying around, so a consolidator service like this is definitely helpful and useful to consumers. (One of the key reasons for me to start my old side project, Holfolio, was being able to see all your investments in one place).


Prospectus takeaways

So it is undoubtedly a good product (just by virtue of them dealing with old pension providers it saves millennials a lot of hassle), but that doesn’t necessarily make it a good investment. Here are some of the key points I’ve taken from their prospectus:

Bear case

Here are a few reasons to not touch the PensionBee IPO.

  1. A RICH valuation

    With a market cap of up to £365m, PensionBee has asset under administration of £1.6bn. This gives it a ratio of market cap to assets of 23% Another pension deal recently announced Columbia Threadneedle buying $124bn of assets for $815m. That is a multiple of valuation to assets of 0.66% - PensionBee is being valued 35 times higher than rivals!

    Equally, PensionBee has a price to revenue (not earnings, but total sales) of 60 - this is also very, very high.

    One of the first points is also one of the hardest ones to ignore - they are very expensive on any metric.

  1. They are tiny

    As this pretty savage comment said, they are still very small:

    Revenues of £6m are very, very low. And its not as if they only recently turned on monetisation - there has been a clear business model the whole time of taking fees. But this implies they will need to dramatically increase their assets under administration (more like 100x than 10x) if they are to turn into a substantial revenue generating business. How much advertising spend is required for them to get assets of £100bn+? Are there enough millennials in the UK who hate talking to their old providers to give them this sort of size?

    Assets under admin of £1.6bn may sound good - but make them absolutely tiny in the pensions world. And the industry is consolidating not fragmenting - will this make it harder for a disruptor to break through, or signs of an ageing industry that is ready to be broken up?

  1. Are they scalable?

    For me, as someone interested in tech, this is the key question. If it costs twice as much to handle twice as much business, then you don’t have a scalable business, are not really a tech company, and as such don’t deserve a tech multiple of your valuation.

    If on the other hand you can onboard new customers with next to zero marginal cost, then you might have an interesting business on your hands, and then high values can be warranted.

    However, the signs here are not great. As revenues have doubled so did the operating loss.

    Likewise with staff - “PensionBee has grown from 34 average employees in the year ended 31 December 2018 to 110 average employees in the year ended 31 December 2020”. They trebled their workforce, while quadrupling their revenue - this also doesn’t point to a lot of scalability. They claim that a 10% increase in the number of customers served per employee is scalable, but I’m not convinced by this chart (with a purposely misleading y axis).

    Is it actually a tech business, or is it a far more manual process with a nice sleek interface on top? If the latter, then a nice UI alone can’t justify being valued 35 times more than peers.

  2. IPO proceeds

    70% of the net raise are to go on advertising. This implies that the company thinks a good marketing campaign will fix everything - is that really all the company requires? It feels like going public just to finance a splashy advertising campaign is a bit of a waste. But perhaps this is me being too negative on the company.
    Their marketing spend is still higher than their total revenues (but down to only 131% of all sales last year..!)

  3. Losses for a long time

    While this doesn’t have to be a deal breaker, it is still worth pointing out - “expect PensionBee to achieve a monthly breakeven point on an Adjusted EBITDA basis by the end of 2023”.

    This is not a great sign, that even on a very favourable metric, a monthly breakeven point is still 2.5 years away. That is about as massageable figure as you’ll ever get, and yet it’s still a long way away.

    Even if you ignore their high marketing spend, they still had a £5m operating loss last year.

Bull case:

Now, for some more positive reasons to consider investing in PensionBee:

  1. Clean corporate structure

    For something more positive, they have a less “troublesome” corporate structure than Deliveroo. Giving dual class shares kept Deliveroo out of all FTSE indexes, meaning passive money couldn’t invest in it, and apparently was one reason why many of the larger, more traditional investors didn’t touch it. (Why this is an issue in the UK but not the US is a question for another time…)

    At least PensionBee sidesteps the controversy with a simple one share, one vote system. Equally, insiders are not selling shares, and the lockups are for longer than Deliveroo (720 days for PensionBee). It definitely has less of a feeling of “cashing out” than the green bicycles did.

  2. The room for growth is huge

    As mentioned earlier, they will need to massively increase their assets to get to any real scale. Fortunately, the pensions market is large enough to do this. The preserved pensions pot alone (pensions not being contributed to or withdrawn from, i.e. old pensions) are worth £1.3 trillion in the UK, and is the segment with the highest growth.

  3. Um…not a lot else…?

    I want to like them, but I just can’t find a lot of positives in the prospectus 😬. Perhaps because forward looking statements and projections are not included, and it is clearly a growth company, things will get a lot better in the future?

    I was hoping to see more signs of positive unit economics, but even that isn’t great. It costs £230 to acquire a customer. The average sized pension pot is £20,000, and Pension Bee charges fees of ~75bps a year, equal to £150 in revenue per customer. That means it takes about 18 months for a customer to generate as much revenue as it cost to acquire them. But this ignores other costs to service them during those 18 months. (Or is this actually a good payback period nowadays?)


Conclusion:

The high valuation means I am not going to invest at the IPO (as well as fears of another Deliveroo flop, and the pain of using Primary Bid versus my own broken a week later when trading becomes unconditional).

While I was only ever seeing Deliveroo as a potential short term flip if the IPO had popped, I think PensionBee has far more potential in the long run. Given the UK market seems to be a lot less frothy than in the US, missing out on the IPO needn’t be the end of the world.

I think the product is great, and their competition are all dinosaurs who are absolutely ripe for disruption, so this has real long term potential. The pension market is so huge that if they did become a dominant consumer player, there is plenty of upside left from their (small but expensive) market cap of £365m.

However, while I really want to like them as an investment, they just feel very expensive for their very early stage. The scalability does not seem convincing (i.e. costs are going up nearly as much as customers/assets are), and £6m in revenue is not great for a 7 year old company who spends more than this on marketing every year.

I’ll keep an eye on them and am rooting for them, but not planning on investing just yet.

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