Revolut: why are only the insiders allowed to cash out?

It’s not just hotshot Silicon Valley venture capitalists who have made fortunes backing Revolut. Hundreds of small punters have also been turned into millionaires after betting a few thousand quid on the London-based currency exchange company eight years ago. They have made 404 times their money — on paper.
According to Crowdcube, the platform that connects potential private investors with fledgling companies needing capital, 433 people took part in a capital-raising by Revolut in 2016 — when the company was heavily lossmaking and a fraction of the size it is today.
They bought in then at just $2.14 a share in a share offering lacking the buzz and excitement that has since engulfed the company. The price at which Revolut employees were able to sell shares in a secondary $500 million issue last week was $865.42 a share.
It’s hard to exaggerate quite how spectacular this level of return is. Professional fund managers dream of “ten baggers” — a single-company investment that generates ten times the original stake. These are rare. A 400-bagger is the jackpot of jackpots.
The average Revolut investor on the Crowdcube site put in £2,309. That stake is now worth £924,000. Braver souls who backed the company with £10,000 are sitting on theoretical profits of more than £4 million.
As Matt Cooper, co-chief executive of Crowdcube puts it: “You’d have to assume these will have been life-changing investments for some.”
That’s an understatement. Crowdcube’s users are not traditional “angel” investors — older, more experienced investors who’ve already made their piles and like to have a flutter on private, high-risk ventures. They are typically 25 to 40, some of them investment novices and “not materially wealthy”, according to Cooper.
The occasional big win is important for this kind of super-risky investing — to help offset losses from the vast majority of private companies that fail or go nowhere. The Crowdcube platform has generated a few respectable wins. Backers of Mindful Chef made three and a half times their money when the recipe box company was sold to Nestlé. Investors in Camden Town Brewery doubled their money when it was sold to InBev.
But nothing has come close to the Revolut return. The only other big winner is Monzo, where investors have made 250 times their money, according to Cooper.
However, there is a catch — and a big one. These outside backers of Revolut, and of Monzo, have not been able to cystallise a single penny of these notional profits. The sellers in last week’s share offering were confined to Revolut employees only. Everyone else is locked in.
Anyone currently employed at Revolut with more than one year’s service was allowed to sell an undisclosed portion of their shares. That included the founder Nik Storonsky, though the company refuses to say whether he personally made a partial exit.
It’s an eye-catching example of the way power has swung from outside shareholders to the insiders of these high-growth, disruptive, potential worldbeaters. It is only fair that the actual founders and workers should be favoured, but the pendulum has surely swung a bit too far.
First, those Crowdcube investors staked hard cash for their shares. Revolut staffers got their share options free as part of their wages. Second, the Crowdcube investors put in their risk capital eight years ago, when Revolut was just a year old, while the Revolut employees have been allowed to cash out after just a year.
It does seem odd that newbies who can’t really claim credit for much of Revolut’s spectacular growth can bank very large windfalls, while long-time backers who put up risk capital in much dicier times are denied even a modest dollop of gravy. This starts to look like two-tier capitalism, where the insiders are running rings around the outside capitalists.
Revolut is not alone. Other private companies are going the same route. Stripe, the payments company, enabled current and former staff to sell $694 million of their stock in April. That deal was partly funded by Stripe’s own capital and valued the business at $65 billion, a 30 per cent uplift on a previous share sale last year. Space X, Elon Musk’s rocket company, has for months been surrounded by speculation it is working on a tender offer to enable executives and staff to crystallise some gains in a transaction that would value the company at as much as $210 billion.
No one will care terribly much so long as the long-run backers are at some point allowed to exit and at prices at least as high as those currently commanded by the insiders. That normally requires flotations. Only when all shareholders are free to sell do we really find out how much these often opaque companies are actually worth.
It is called price discovery and it is the key ingredient of public share markets that ultimately makes them more credible and more trusted than private markets, where daylight and awkward questions are seldom allowed to intrude.
The way some private companies constantly seem to grow in value though a series of beautifully choreographed share issues inevitably raises suspicion. Yes, the private equity backers are stumping up fresh cash at a higher price each time, but they may only be forking out ever higher prices because the transaction then values their existing holdings even more highly. This is how bubbles inflate.
In the case of Revolut, you don’t have to be a cynic to wonder whether this company is really worth more than, say, Barclays. Revolut’s £34.6 billion valuation now outguns Barclays’ £33.1 billion.
Revolut is loved by its customers, thanks to an innovative business model that has slashed the price of currency exchange. It has just clinched a partial banking licence in the UK, albeit with restrictions. It is fabulously fast-growing, replicating the kind of revenue growth achieved by Facebook (now Meta Platforms), Google (now Alphabet) and Amazon in their most electrifying years.
But it has been buoyed by a recent net interest income bonanza and past crypto trading booms, which may not be sustainable. Its accounts have been questioned by its auditors in the past and it has never been tested by a major recession.
The valuation prices Revolut on a spicy 101 times net profits. That compares with 17.2 times at Barclays and just 6.4 times at Lloyds Banking Group. If something did go even moderately wrong at Revolut, it would go catastrophically wrong for the investors. And it would raise serious questions as to why insiders have been so favoured.
Patrick Hosking is Financial Editor of The Times