A different kind of real estate listing

“We don’t need to go public in order to raise capital.”

It was September, and Robert Reffkin was making an appearance on CNBC’s Squawk Box, touting his firm’s ability to attract funds without needing an IPO. With the housing market booming and tech stocks having a banner year despite economic turmoil in other sectors, Compass’ chief executive was deflecting what’s become a perennial question about the firm’s long-term strategy. “August revenue was 70 percent ahead of last year,” he said. “Our business is really surging.”

But behind the scenes, Compass has indeed been laying the groundwork for an IPO, long seen as the most viable path forward for the residential brokerage, which has raised $1.5 billion from investors since its founding in 2012, and has boosted its M&A activity since first receiving funding from SoftBank in 2017.

Read related story: The definitive guide to the Compass C-Suite

Since February, Compass added four independent directors and bulked up its C-suite, filling key roles after a period of high churn. (Former chief people officer Sara Patterson lasted three months before taking a job at Lemonade, an insurance startup.) In October, it expanded to Hawaii, its first new market in two years. The same month, it also struck a deal to buy title and escrow startup Modus, a step in its stated goal of building an end-to-end real estate platform.

Two months after Reffkin’s TV appearance, Compass sent the strongest signal yet that it plans to go public, tapping Morgan Stanley and Goldman Sachs as underwriters for a potential IPO next year.

Reffkin, formerly chief of staff to Goldman Sachs COO Gary Cohn, and Ori Allon, a techie who sold two companies to Twitter and Google, teamed up to found Compass in 2012. They were able to make a splash right away — getting Mayor Michael Bloomberg to attend the launch — and were successful at pulling in venture capital for a business usually ignored by such investors. But that money also made it a key antagonist for established firms, who accused it of buying market share and top talent.

Last year, Compass was the No. 3 brokerage in the U.S. with $91.3 billion in sales volume, according to research firm Real Trends. It was valued at $6.4 billion after a $370 million Series G funding rounding in July 2019, many multiples of chief rival Realogy.

But it certainly wasn’t immune to the pandemic.

In March, Compass laid off 15 percent of its staff and projected revenue would fall 50 percent. “None of us knows how long this crisis will last,” Reffkin wrote in a letter to Congress urging lawmakers to include independent contractors in a stimulus package.

When the housing market roared back to life, so did Compass. The brokerage reported record revenue in June, July and August. In October, home sales rose 4.3 percent to a 14-year high, according to the National Association of Realtors.

Meanwhile, the tech sector’s resilience during Covid had whipped private and public investment into a frenzy. By mid-December, there were 245 IPO filings in 2020, up from 204 last year, according to Renaissance Capital, which tracks IPOs. Total proceeds from IPOs were $76.4 billion, up 65.1 percent year-over-year.

Other real estate services firms began taking advantage of the hot IPO market. Dan Gilbert’s Rocket Companies, the parent firm of Rocket Mortgage and Quicken Loans, went public in August. Airbnb pulled the trigger on its own long-awaited IPO this month, achieving a $100 billion market cap after its stock more than doubled on the first day of trading.

Many of the industry-focused companies exploring the public markets have a common backer: SoftBank.

Lemonade went public this summer, as did Chinese listings platform Beike Zhaofang. Smart-glass maker View and instant-homebuying startup Opendoor plan to go public via blank-check firms. Even WeWork has said a public offering may once again be on the horizon.

Going public will mean Compass will have to finally open its books.

For years, rivals have accused the firm of lavishing agents with eye-popping bonuses and unsustainable splits. Following WeWork’s botched IPO, Compass took pains to distance itself from the co-working firm’s reckless spending.

“It may seem obvious,” CFO Kristen Ankerbrandt wrote in a memo at the time. “But it’s worth stating that it is hard to draw any parallel between our businesses.” Compass has a “culture of frugality,” Ankerbrandt said, that requires all executives to fly coach and get approval for any expense above $1,000 — a not-so-subtle reference to former WeWork CEO Adam Neumann’s private-jet escapades.

But since 2018, Compass has scooped up independent firms as part of a strategy that makes growth the top priority.

“We buy those who understand it is not worthwhile to compete with us,” Ori Allon told Israeli business news site Calcalist that year.

Industry analyst Mike DelPrete estimated that Compass spent between $220 million and $240 million in 2018 and 2019 to acquire at least 14 smaller firms with 4,000 agents combined. In his 2019 analysis, he calculated the deals cost about $55,000 per agent — a figure that didn’t include the five- and six-digit bonuses Compass sometimes offers.

Realogy accused Compass last year of leveraging its deep pockets to poach agents with “grossly inflated compensation packages.” It also accused Compass of flouting agents’ noncompetes and other “illicit business practices,” in an ongoing lawsuit.

Over the past year, firms with a tech bent had a distinct edge: Redfin’s stock is up 180 percent year-over-year, compared to Realogy’s 25.4 percent gain. Compass bills itself as a tech platform for real estate, but many have questioned its tech credentials.

There are also questions about Compass’ audacious goal to capture 20 percent market share in the top 20 U.S. markets by 2020. While it hit the goal in cities like San Francisco by acquiring the top three independent firms, it faces an uphill battle in fragmented markets like Atlanta. Since the pandemic, residents of major cities (like San Francisco) have fled to secondary markets where Compass has a smaller footprint.

In a December memo to agents, Reffkin struck an optimistic tone about Compass’ future IPO, which it said would enable it to raise cash to invest in agents and tools. “We will be able to invest more in building toward the Compass Northstar,” he said. “Anything an agent needs, Compass provides.”