Swedish music streaming service Spotify AB has raised $1 billion in convertible debt from private equity firm TPG Capital and hedge fund Dragoneer Investment Group. Other clients of bookrunner Goldman Sachs Group Inc. (NYSE: GS) also participated in the deal, which is expected to close at the end of this week.
Spotify has raised to date over $1 billion in venture funding from major investors including Kleiner Perkins, Li Ka-shing, 137 Ventures, Accel, Goldman Sachs, Groupe Arnault, Founders Fund, D.E. Shaw, DST Global, Discovery Capital, Fidelity Ventures, Technology Crossover Ventures, The Coca Cola Co., and others.
In January 2016, Spotify acquired two new companies, Cord Project and Soundwave, to expand its social networking and voice messaging capabilities.
Tech startups are increasingly turning to convertible debt—bonds that can be exchanged for stock—as investors push back on rich valuations amid a volatile stock market and economic uncertainty, said The Wall Street Journal, which first reported the convertible debt deal. By raising debt instead of equity, Spotify adds to its war chest without the possibility of setting a lower price for its stock, which can sap momentum and hamper recruiting. In June 2015, Spotify was valued at $8.5 billion, the Journal added.
The deal is similar to the one that Goldman Sachs arranged for Uber in January 2015, said The New York Times. The ride-hailing company raised $1.6 billion in convertible debt. Should the company not go public within a certain time, the interest rate on those securities would climb.
“Spotify also agreed to pay annual interest on the debt that starts at 5% and increases by 1 percentage point every six months until the company goes public, or until it hits 10%, the people said. This interest—also called a “coupon” and in this case paid in the form of additional debt, rather than cash—is commonly used in private-equity deals but rarely seen in venture funding,” commented the Journal.
Spotify is a commercial music streaming, podcast and video service that provides digital rights management-protected content from record labels and media companies. It is available in most of the Americas, Western Europe and Oceania. Music can be browsed or searched by artist, album, genre, playlist, or record label, featuring over 30 million songs. Spotify has over 75 million active users, including about 20 million paid users. The company was founded in 2008 by Swedish startup Spotify AB. Spotify Ltd. operates as the parent company, headquartered in London, while Spotify AB handles research and development in Stockholm.
Spotify is facing increasing competition from companies including Apple Inc’s Apple Music, Pandora Media Inc and newer rivals such as Europe’s SoundCloud Ltd and U.S. music producer and rapper Jay Z’s Tidal, said Reuters. SoundCloud launched a music streaming service in the United States starting at $9.99 per month.
TPG Capital is a leading global private investment firm with $70.2 billion of capital under management. The firm was founded in 1992 by David Bonderman, James Coulter and William S. Price III, and is headquartered in Fort Worth, Texas, and San Francisco, Calif. The company has additional offices in Europe, Asia, Australia and other parts of North America. It is one of the largest private equity investment firms globally, focused on leveraged buyouts, growth capital and leveraged recapitalization investments in distressed companies and turnaround situations. TPG also manages investment funds specializing in growth capital, venture capital, public equity, and debt investments. The firm invests in a broad range of industries including consumer/retail, media and telecommunications, industrials, technology, travel/leisure and health care.
Dragoneer Investment Group LLC is a long-only, growth-oriented public and private investment firm based in San Francisco. The firm has $1.3 billion in assets under management. The firm was founded in 2012 by managing partner Marc Stad, who previously worked at TPG, Parthenon Capitol, McKinsey & Co., and Citigroup. He also served as president of the City and County of San Francisco Finance Corporation. He received an AB degree in Government from Harvard College and an MBA degree from Stanford. Pat D. Robertson is the firm’s COO and chief compliance officer.