K-Fin Technologies IPO: Why many mutual fund houses are not in the list of anchor investors?

K-Fin Technologies IPO: MF houses understand the business of KFINT very well, as each one avails the services of either KFINT or its nearest competitor, Computer Age Management Services (CAMS), to manage their back office operations.

The anchor book allocation of K-Fin Technologies (KFINT), the registrar and transfer (R&T) agent that floated an Initial Public Offer (IPO) on December 19, shows that just eight fund houses (all serviced by KFINT) received allocation of shares. KFINT is one of the two largest R&Ts in the Rs 40-trillion Indian mutual fund (MF) industry.

Does that mean most fund houses have decided to skip the shares on offer? Though fund managers do not discuss individual stocks, we asked some experts for the reasons in this case.

The offer

The KFINT IPO is an offer-for-sale (OFS) where the existing investors are offering their shares in the price band of Rs 347 to Rs 366 per share.

Retail investors keenly observe the names of anchor investors to get a cue of the quality of the IPO. An issue is considered worthy of investment if names known for long-term investing are seen in the anchor list. However, in the last one year some of the most sought-after IPOs saw subsequent share price erosion after successful listing on the stock exchanges. That has also made many investors understand why fund houses avoid some IPOs.

MF houses understand the business of KFINT very well, as each one avails the services of either KFINT or its nearest competitor, Computer Age Management Services (CAMS), to manage their back office operations. They are best positioned to figure out if these companies will make money in the long term. The CAMS IPO hit the market in September 2020 in the price band of Rs 1,229 to Rs 1,230 per share. The stock now quotes at Rs 2,188. As per Value Research, as on November 30, 2022, 20 fund houses held shares of CAMS in their schemes’ portfolios.

Riding the financial services wave

Service providers to financial service companies are in a sweet spot. Financial service is an expanding space and investors keen on long-term growth are bullish on this theme.

Vikas Gupta, Founder and Chief Strategist, Omniscience Capital, says, “Penetration of financial services is low and there is scope for growth over the next one decade. The structure of the RTA industry is such that consistent profitability for a well-managed business is possible. However, current valuations are not cheap and many investors may want to observe the business and the margins on quarterly basis after the company goes public, before deciding to invest in it.”

The future growth of financial services companies may attract many growth investors. The large opportunity of future profits can be attractive, especially if one has a long-term view on the business. “A few fund houses that are following the growth style of investing might want to participate in the IPO of this technology-driven financial services company,” says Ravi Kumar TV, Founder of Gaining Ground Investment Services.

OFS, not fresh sale of shares

Some investors also give utmost importance to the objectives of the IPO, along with the future prospects. “No doubt it is a good business. But this is just an offer-for-sale. Had the company raised money to fund future growth we would have considered investing. Also, the valuation they are asking for is too costly to invest,” says a senior official of a KFINT-serviced fund house on the condition of anonymity. “We will track the growth story as it unfolds and see how the company funds it. If we get the shares at the right price post listing, then we do not mind investing in it.”

CAMS serviced funds: Have these been given a miss?

According to industry insiders, the anchor investors’ list is used as a marketing tool by the investment banker. Marquee names in the anchor list infuse confidence in the minds of investors. “Promoters and investment bankers generally choose big names while allotting shares in the anchor list. Anchor allocations are moreover an invitation-only activity. Since we are serviced by CAMS, that could be another reason why we were not approached,” says a senior official with a CAMS-serviced MF house.

A fund manager known for his focus on value, concurs. He said, on a condition of anonymity, “We are very selective when it comes to IPOs. Fund houses that keep investing in IPOs tend to develop relationships with merchant bankers. None approaches us for anchor allocations.”

“We have no option, but to invest in the institutional investors’ category in those IPOs where we have a positive view,” he added.

This fund manager had invested in the shares of CAMS, but booked profit as the prices soared.

“We are never in the game of anchor allotments, as we are too conservative. As far as the KFIN IPO is concerned, there is no compelling reason to apply in this IPO at this price,” said the chief investment officer with a KFINT-serviced MF house, who too, preferred to speak on condition of anonymity.