Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Back in 2010, German Internet entrepreneur Oliver Samwer cultivated a powerful patron in Cristina Stenbeck, the heiress behind Swedish investment fund Kinnevik.

Eager to modernize family holdings that were historically in paper, iron and wood, Stenbeck backed Samwer's start-up incubator Rocket Internet and a slew of associated companies to the tune of about 2 billion euros ($2.3 billion) over the years. Kinnevik became Rocket's biggest shareholder after Samwer and his brothers, and remains so today with a 13.2 percent stake.

It's been a profitable association largely because of online retailer Zalando, which went public in 2014 and earned both parties a big windfall. Kinnevik still owns 31 percent of Zalando, which is worth 30 percent more than its IPO price.

Yet lately Kinnevik, which also invests in e-commerce and online banking companies outside Rocket's orbit, has been issuing an implicit critique of Rocket each time it publishes its own financial results. The valuations Kinnevik ascribes to the investments it has in some Rocket companies have been well below those given out by Rocket: 

Different Perspective
Rocket Internet and its biggest shareholder Kinnevik value their commonly owned startups differently
Source: Company filings
*Value before 27th April funding round, which revised it lower. Data as of end 2015 for Kinnevik, March 31 for Rocket

Unlike Rocket's "last portfolio value," listing the valuation from each holding's most recent investment round, Kinnevik also provides an estimate of how much the companies are worth now. It uses comparisons of traded peers, then applies multiples based on trailing 12 month sales, according to its reports.

To be clear, both are acceptable under IFRS accounting. Kinnevik's giving more color, but in the process it's throwing some shade on Rocket.

This matters. Some investors are skeptical about Rocket's model, similar to that of a listed venture capital fund that makes money when it sells a start-up or does an IPO. About 25 percent of Rocket shares are out on loan to those betting against the company, according to Markit. Short-sellers say it's difficult to value its portfolio of unlisted start-ups, many of which are growing sales rapidly yet making losses. Rocket doesn't help by disclosing sparse metrics for some start-ups.

The usefulness of Kinnevik's methodology was highlighted further on Wednesday. As it reported first-quarter results, there was also news of a 300 million euro funding round for Global Fashion Group, an online retailer owned 26 percent by Kinnevik and 22.5 percent by Rocket. Kinnevik will kick in 200 million, Rocket 100 million and the funding values the company at about 1 billion euros. That’s way below the 3 billion euros in Rocket's last portfolio value; lower even than Kinnevik's 1.71 billion euros as of Tuesday night.

And there are recent signs of Kinnevik distancing itself from Rocket. Lorenzo Grabau, Kinnevik CEO and former Goldman Sachs banker, stepped down as Rocket chairman late last year, though he remains on the board. Kinnevik didn't take part in a $420 million co-investment fund that Rocket unveiled in January, and has been making its own bets on fintech and healthcare start-ups.

In any case, Kinnevik and Rocket both suffer from a similar difficulty: holding a bunch of different stakes in companies means their shares trade at a discount to net asset value. Rocket shares are at a 38 percent discount to its own last portfolio value. Kinnevik, which owns more listed assets so is easier to value, has a discount of about 17 percent.

Pesky Discount
Investors see Rocket as worth less than the value it ascribes to its portfolio
Source: Bloomberg, company filings

While that's a common problem for listed private equity funds, Kinnevik argues its shares should trade in line with net asset value because it brings know-how to its portfolio companies and adds value by helping run them, a message parroted by Rocket.

To narrow the gap Kinnevik's been buying back shares. It would be hard for Rocket to do similar, given its image as a fast-growing tech incubator. One lesson the Samwers could take from Stenbeck, though, is the extra clarity around Rocket's portfolio value. Investors would welcome that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net