Why PE investors bet big on Flipkart even as mutual funds were sceptic

Private investors look at future growth potential; MFs value a firm based on current business

Flipkart’s latest funding round of $1.4 billion at a valuation of $11.6 billion shows that private investors look at growth opportunities differently from mutual funds, which value a company based on its business as against its future potential.

Mutual funds such as Morgan Stanley, Fidelity, T Rowe Price and Valic had marked down their investments in Flipkart last year, getting caught in a global trend that saw internet and technology companies lose their notional value.  These firms had to publicly disclose their perception of the true value of shares held by them in private firms.
Interestingly, while large investors such as Tiger Global, Accel and Naspers had board seats in  Flipkart, where they had access to information beyond financial numbers disclosed by the company, these mutual funds had to make do with the set of numbers shared by Flipkart and their own reading of the market and competition.

In addition, private equity and venture capital firms follow their instinct to bet risk capital on firms even if they don’t have strong financials, betting on their future potential instead. Yet, these investors made investments in Flipkart at $ 11.6 billion, around 23 per cent down than the last fund raising by the e-commerce firm at $ 15.2 billion.

“In this case whether it’s eBay, Microsoft or Tencent, they’re probably looking at it from a longer term perspective, whereas a PE fund would be limited by the life of its fund from which it is investing,” Devangshu Dutta, Chief Executive at Third Eyesight, a consultancy for new economy firms.

Some mutual funds had marked down the value Flipkart to nearly a third of the $15.2 billion the company was valued when it raised $700 million in July 2015. While the Flipkart founders had called the exercise of markdowns a mere “theoretical exercise” some investors and analysts say merit in the concerns mutual funds had.

“Depending on the lifecycle of the fund, they (PE firms) need to get out of their investee companies and that’s what drives the behaviour. If an investee is asking for a very steep valuation and the fund is already mid-life, that’s not going to happen,” added Dutta.