One of the world’s biggest private equity firms risks missing out on a potential post-flotation surge in the value of Spotify, the digital music platform.
Sky News has learnt that TPG Capital is preparing to open formal talks with Spotify about the terms under which a bond it holds alongside other investors would convert into shares in the music service.
Under a deal struck last year, TPG and Dragoneer Investment Group, another fund, invested $1bn in the bond, which would convert into equity when Spotify launched an initial public offering (IPO) in New York.
However, Spotify, which has amassed 60m paying subscribers and is said to be seeking a $10bn valuation when it goes public, is leaning towards using an alternative route known as a direct listing.
The latter option would not entail hiring banks to underwrite the issuance of new shares, but instead list Spotify’s existing equity on a public exchange.
That would avoid Spotify having to issue new shares to TPG and Dragoneer at a steep discount to an IPO price – one of the key terms of last year’s convertible bond issue – and save millions of pounds in fees to investment banks.
Insiders pointed out that Spotify had yet to decide whether to pursue a direct listing or an IPO, and that there had been no negotiations so far with TPG over the issue.
Sources close to the situation said TPG and Spotify would hold discussions shortly about how the buyout firm could be treated “fairly” if its debt does not automatically convert to shares when the company goes public.
“It is about working out the art of the possible,” said one.
Financiers believe that Spotify is likely to see a post-listing “pop” in its share price compared to current private market valuations because of the progress it has made growing its customer base and signing long-term agreements with record labels including Universal Music Group (UMG).
In a statement issued to Sky News, a TPG spokesman said the private equity firm “has a strong relationship with Spotify”.
He added: “We continue to work collaboratively with the company and any suggestion otherwise is categorically false.”
Spotify declined to comment, although a person close to the music-streaming service confirmed that the convertible debt would not turn into equity if it pursued a direct listing rather than an IPO.
The Swedish-based music service has surprised some music industry analysts with its rapid subscriber growth over the last year.
Its paying customers hand over a fixed fee each month in exchange for unlimited access to approximately 30m songs.
Spotify has outpaced rivals including Apple, and its prospects have improved markedly since it was valued at $8.5bn in a fundraising undertaken in 2015.
In addition to UMG, it has struck a licensing deal with Sony Music, and a similar agreement with Warner Music Group is thought to be imminent.
Insiders believe a listing is more likely to take place in early 2018 than the fourth quarter of this year.