During the fourth quarter, our fund made a significant new investment in IWG, a London-listed company that manages shared workspaces. IWG operates under multiple brands, with Regus being the most well-known. They have a presence in over 3,400 locations across 120 countries, serving a diverse customer base ranging from freelancers to multinational corporations.
One of the most common questions about IWG is how it differs from WeWork, especially considering WeWork’s bankruptcy. Unlike WeWork, IWG did not prioritize rapid growth at any cost. Furthermore, IWG has the ability to terminate leases with minimal breakage costs, unlike WeWork. IWG’s management has also gained the trust of investors, in contrast to WeWork’s questionable practices.
Unlike WeWork, IWG is led by its founder Mark Dixon, who still holds a significant ownership stake in the company. IWG has a more extensive network, with over six times the number of locations compared to WeWork. This allows for more effective customer acquisition and retention, as well as better monetization of properties. Additionally, IWG generates a significant portion of its revenue from ancillary products and services, unlike its smaller competitors who rely on short-term leases.
IWG also has a stronger presence in suburban areas, which aligns well with the current trend of companies requiring employees to work from the central office a few days a week. This enables IWG to provide workspaces closer to employees’ homes on non-office days. It also allows IWG to tap into a broader range of companies located outside major cities.
Another notable difference is IWG’s profitability. Unlike WeWork, IWG has weathered both the Great Recession and the Covid pandemic and has a track record of profitability spanning over 30 years. In summary, IWG distinguishes itself from WeWork with better lease structures, superior management, more strategic locations, and stronger financial performance.
However, simply being different from WeWork is not enough to make a compelling investment thesis. Thankfully, we believe that IWG’s evolving business model presents opportunities for significant earnings growth and an expansion of its valuation multiple. We would not have invested if IWG had stuck to its historical business model of signing long-term leases, improving spaces, and renting them out on a short-term basis.
To address the cyclicality of the flexible workspace model, IWG has implemented various measures. One significant change is tying landlord payments to location revenues, reducing the company’s exposure to fixed lease costs. Additionally, IWG has introduced an asset-light “partnership” model, where landlords bear the capital investments and operating costs of a location. In return, IWG receives a management fee based on revenues. This model eliminates cyclicality and reduces capital intensity for IWG.
The transition to this new model is facilitated by the current challenges faced by the corporate real estate market. With rising vacancies, landlords are seeking flexible solutions to fill their buildings. IWG provides a turnkey solution to landlords, managing the build-out, marketing, client onboarding, and daily operations of flexible workspaces. Landlords benefit from higher revenues and lower costs, while IWG earns fees and potential upside if the property performs well.
This shift to an asset-light and risk-light partnership model fundamentally changes IWG’s growth economics. In the past, the company had substantial capital expenditures for expansion. However, with the new model, IWG’s growth is primarily dependent on signing up partners rather than capital investment. Growth capex is projected to decrease significantly, allowing for more efficient expansion.
IWG’s investor day presentation highlighted the success of their partnership model in the United States, with hundreds of new locations signed up. By partnering with IWG, landlords can easily convert vacant spaces into revenue-generating flexible workspaces without the need for additional resources. IWG’s established marketing, sales, billing, staffing, and ancillary services further enhance the value proposition for landlords.
From the customer perspective, shared workspaces offer numerous benefits. Employers can reduce operating costs and capital expenditures while providing flexibility and proximity to employees’ homes. IWG’s network effects, scaled economies, improved competitive landscape, and alignment with the growing demand for flexible work options position the company for success.
Overall, IWG stands out as a leader in the flexible workspace industry, with a solid track record of success and a strategic shift towards an asset-light partnership model. The company’s improving business model, along with favorable market dynamics, present opportunities for significant growth and valuation expansion.
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