Sanity Check

A Whizzbang Withdrawal From Rocket Internet

A Kinnevik retreat might not be great for disclosure.
At Closing, April 25th
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At Closing, April 25th
308.30 SEK

Oliver Samwer is getting what he wanted: more freedom over how to run Rocket Internet SE, the German startup factory he founded. One of his earliest backers, Kinnevik AB, has sold half of its Rocket stake, giving up its standing as the biggest outside shareholder after Samwer and his brothers. Investors were better off when Kinnevik had more influence.

Kinnevik sold 10.9 million shares overnight for 19.25 euros each, a 10 percent discount to the closing price, raising 207 million euros ($218 million). That's just under half the Rocket share price of 42.50 euros at its 2014 IPO.

The fund was taking advantage of a recent mini-rally. Rocket shares have risen 11.6 percent this year after a media report said a listing of its German takeout company Delivery Hero might happen soon.

Despite its poor performance since IPO, Rocket has been lucrative for Kinnevik. It has generated an annualized internal rate of return of 91 percent since the initial investment of 155 million euros in 2010, or six times invested capital, the company told Gadfly.

Kinnevik, which ousted its CEO in December and has yet to name a new one, wants to redeploy capital into younger startups and to change direction under new leadership. Its investment in Rocket goes back to 2009, when Samwer wooed Kinnevik’s family backer Cristina Stenbeck with his pitch of cloning Silicon Valley successes in Europe. Kinnevik put about 1 billion euros into Zalando, an online fashion retailer backed by Rocket, and more into Rocket itself. Both companies also made serious money on Zalando, which has reached a market capitalization of 9.5 billion euros.

The Samwers and Kinnevik eventually clashed over strategy and the Swedish investor didn't take part in a 1 billion euro fund Rocket raised last year.

As I've argued before, Kinnevik’s presence at Rocket has been a godsend for other investors since it gave more regular and realistic valuations of Rocket’s assets. They were often lower than the Rocket figures -- known as “last portfolio value” -- because they used a different method. Rocket only updates its valuations when there's an outside funding round, whereas Kinnevik does so every quarter by bench-marking to listed peers.

Best Guess

How Rocket's own valuations of select portfolio companies have evolved

Source: Company reports

The tensions built until the Kinnevik CEO and another executive stepped down from Rocket’s board in June. Their departure meant fewer credible, financially-savvy outsiders overseeing Samwer.

That Kinnevik is backing off means the light it shone on Rocket's numbers may dim. There’s only a 90-day lock up on it selling the rest of the stake, which creates an overhang until Kinnevik's intentions become clear. Increased liquidity may also allow more investors to bet against Rocket, according to company skeptic Neil Campling of Northern Trust Securities, since it’ll be cheaper and easier to borrow shares to short. The short interest in Rocket has halved to about 19 percent from a year ago, according to Markit data, but remains stubbornly high.

Betting Against

Short sellers have targeted Rocket Internet

Source: Markit data

The concerns about Rocket’s business model remain, regardless of the identity of its backers. For all its talk of being a builder of companies, it is best understood as a listed venture capital fund. It invests in or founds startups and nurtures them until trying to exit via a sale or an IPO. By its nature, what Rocket does is risky since startups usually fail.

That's not the only reason it is ill-suited to public markets. Investors value public companies based on expected future earnings. Rocket’s companies are unprofitable, though losses are narrowing. It only gets cash in the rare event that it sells or lists a company. The stock market finds it hard to feel entirely comfortable about all this, and its best ally is halfway out of the door.

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

    To contact the editor responsible for this story:
    James Boxell at

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