Buffett, Softbank nurse heavy losses as Paytm’s lock-in period nears end

Masayoshi Son’s Softbank, a maverick in start-up funding, and Berkshire Hathaway’s Warren Buffett had invested considerable sums in Paytm prior to the fintech giant’s public market debut in November 2021.

However, the disastrous listing of Paytm following a successful initial public offering process last year has led to heavy losses for them.

Masa Son’s $100-billion Softbank Vision Fund holds a 17.46 percent stake in One 97 Communications, which was accumulated between 2017 and 2019 at an average price close to Rs 900 per share, according to data compiled by Goldman Sachs India.

Based on the current market price of Paytm’s stock, Son’s investment is down 27 percent. At the time of the company’s IPO, Softbank was sitting on a notional gain of nearly 140 percent on its investment reflecting the quantum of value destruction Paytm’s stock has gone through over the past 10 months.

Similarly, Buffett’s Berkshire Hathaway, which holds around a 2.41 percent stake in One 97 Communications, is also considerably under water in its investment. Berkshire accumulated its stake in the company at an average price of nearly Rs 1,300 per share in 2018, according to Goldman Sachs data.

Based on the current price, Berkshire is sitting on an even larger notional loss of 49 percent on its investment in the Noida-based fintech.

Both Softbank Vision Fund and Berkshire Hathaway had offloaded a part of their stakes in One 97 Communications during the company’s IPO in November 2021. Berkshire and Softbank have shown no intention of paring their stakes in Paytm when the lock-in period ends.

Alibaba and all those gains

Among the major pre-IPO investors, Alibaba and Elevation Capital are still enjoying significant gains on their investments even though their profits have come down considerably.

Alibaba.com and Antfin, two companies owned by Chinese billionaire Jack Ma, hold a 31.14 percent stake in the company accumulated at an average price of around Rs 300 per share. In that sense, Jack Ma is still enjoying more than 100 percent notional gains on his holdings in Paytm and will likely be the top contender to trim his stake when the lock-in period ends on November 18.

In addition to the significant gains being enjoyed by Alibaba and Antfin, the recent aversion to Chinese ownership of Indian technology companies could also play a major part in the Chinese conglomerate’s decision to reduce its stake in Paytm.

Elevation Capital, owner of a 15.1 percent stake in Paytm and one of the earliest investors in the company, is currently enjoying more than 600 percent returns on its investment. Paytm has been one of the most famous bets for Elevation Capital, earlier known as SAIF Partners, as it invested in the company from the early stages back in 2007 till as recently as 2019.

Dealers believe Elevation Capital, too, could look at paring part of its stake to book profits at a time when many of its technology bets have bled in 2022’s crash in global technology-focused stocks.

“We have seen other stocks in our coverage (most recently Zomato in July 2022) face downward pressure in the days following a lock-in expiry but recover in the week thereafter,” Goldman Sachs said in a recent note.

Rising scrutiny

Any reduction of considerable stake by the likes of Elevation and Alibaba entities in Paytm come November will also have implications for its Founder and Chief Executive Officer Vijay Shekhar Sharma.

In August, Sharma managed to survive a resolution that enabled a significant hike in his remuneration, thanks to the clutch of votes from the pre-IPO investors in the company, who remain cosy to a founder that has made them significant money over the years.

Public institutional investors, however, rejected the resolution for Sharma’s pay hike with proxy advisory firm Institutional Investor Advisory Services imploring shareholders to reject the resolution.

Investors after being enamoured by the success story of India’s startup ecosystem scurried to participate in a clutch of IPOs from such companies in 2021 in the hope of becoming a part of what seemed a never-ending value creation journey.

A year on, those investors are annoyed by the destruction in the market value of such companies, thanks in part to a sell-off in global technology companies as interest rates rose, and are demanding more focus on turning a profit instead of chasing growth by burning cash.

Analysts believe that the likely increase in shareholding of public institutional investors in Paytm following the end of the lock-in period may pile pressure on Paytm’s management including Sharma to deliver on the promise of profitability.

Paytm has promised to turn profitable at an operating level after adjusting for the cost of its significantly large employee stock option plan by September 2023 after a near 70 percent decline in its stock price since the listing raised concerns over its viability.

Any failure or delay to deliver on the promises made by Sharma and Paytm going ahead could be faced with backlash from public investors, who are unlikely to offer the company the long rope provided by pre-IPO investors.

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