The recent IPO of India's One97 Communications Inc. (PAYTM), the parent company of popular payments app Paytm, has attracted attention for all the wrong reasons. Shares in the company have plunged 40% from their IPO price as the corporation has struggled to attract new investors to its offering. Some blame overpricing of the IPO.
Financial commentators have been keen to point out that this company is backed by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). In September 2018, the conglomerate invested $300 million in the fintech enterprise in a funding round that valued the group at $10 billion. Some have mistakenly linked this investment to the Oracle of Omaha, Warren Buffett (Trades, Portfolio) himself.
However, based on the evidence available, it does not seem like Buffett was behind the deal. In an interview in 2018, Paytm's founder and chief executive officer Vijay Shekhar Sharma told livemint.com that he met with investment manager Todd Combs when he went to Berkshire's headquarters. In fact, Combs' decision to invest some of Berkshire's funds in Paytm has been well-documented.
The meeting with Combs
In what was originally scheduled to be a one-hour meeting but eventually turned into a three-and-a-half discussion, Combs and Sharma discussed various topics, including the Indian digital payment ecosystem.
Buffett was not present at the meeting, and when he was asked why he thought Combs, not Buffett, was leading the investing, Sharma replied that he did not know Berkshire's internal process, but Combs had completed other deals in the payments sector.
We also know that Combs had some input in Berkshire's decision to acquire a position in the Brazilian payments company, StoneCo (STNE, Financial), and later Brazilian digital bank operator Nu Pagamentos SA, aka Nubank.
In total, these deals do not amount to a significant amount of Berkshire's capital. According to my figures, the initial investment across these three businesses was around $1.2 billion. That is approximately 0.4% of Berkshire's equity investment portfolio and an even smaller percentage of the overall group's $700 billion-plus asset base.
Considering these figures, I think it is a mistake to associate these payment companies with Buffett. Further, I think we should acknowledge that these investments are part of a broader investment strategy being undertaken by Combs.
A history in the sector
Before he moved to Berkshire in 2010, Combs managed Castle Point Capital. This hedge fund specialized in financial service companies and real estate investment trusts. An article in Forbes pointed out around the time of his appointment, some of Castle Point's most recent investments at the time were Leucadia National (Trades, Portfolio) Corp and Hartford Financial Services Group (HIG, Financial).
The article also queried why Buffett would bring a manager on who knew so much about financial services but so little about consumer goods stocks. This second question has answered itself over the past decade. Buffett has substantially increased Berkshire's allocation towards the financial sector since the financial crisis.
He has said that he likes the economics of the sector and its ability to earn a high return on invested capital, especially now regulations have reigned in some of the excesses that were prevailing before 2008. Combs' fintech trades could be seen as an extension of this strategy. Fintech is disrupting markets worldwide, particularly emerging markets where trust in existing banking institutions is relatively low.
Traditional banking institutions are also finding it difficult to transition to a more digital world, presenting an attractive opportunity for new companies to move into the market and build a digital presence from the ground up. This could be why Combs has been spreading his bets across the emerging market fintech sector. He may want some exposure to the financial sector in emerging markets but does not want exposure to established banking institutions and their legacy issues.
Fintechs such as Paytm present an interesting way to get around these issues and an avenue for Berkshire to invest capital without some of the stringent regulations that apply in public equity markets.
