NY fund manager warns of risks facing Afterpay

New York hedge fund manager Beeneet Kothari is no fan of the buy now, pay later sector.

Tekne Capital boss Beeneet Kothari

Beeneet Kothari, the New York hedge fund manager who pitched the best-performing stock recommendation at the prestigious Sohn Hearts & Minds Conference in 2018 — has warned investors of the risks faced by one of Australia’s favourite tech stocks, Afterpay Touch.

Kothari once worked for Stanley Druckenmiller — of Quantum Fund and Duquesne Capital Management fame — and now counts the Druckenmiller, Soros and Rothschild families, as well as some Australian moguls, as clients.

Investors who followed his Hearts & Minds tip to buy Brazilian digital payments solutions company, NYSE-listed PagSeguro Digital, would have doubled their money within 10 months. PagSeguro shares are still up more than 50 per cent since the conference last November.

He will be back again this November to pitch another underpriced tech business.

Similarly huge gains were on offer for those who backed No 2 ranked speaker, Jun Bei Liu of Tribecca Investment Partners.

Her recommendation to buy New Oriental Education & Technology has more than doubled since last November.

Attendee Ian Gibson backed the top three recommendations in the investment competition run by CommSec, for a total return of 91 per cent by September and that’s scored him a business class trip to New York for the 2020 Sohn Investment Conference donated by Virgin.

Kothari’s Tekne Capital runs about $US1bn ($1.46bn) in a “hyper-concentrated” technology fund of about a dozen stocks across the globe — including rock-star names like Alibaba, Facebook, PayPal and Alphabet — but he’s no fan of the buy now, pay later sector.

“Those to me are a feature and not a platform,” he said.

“Businesses like Klarna in northern Europe or Afterpay in Australia — these have grown because they operate in a fuzzy regulatory regime, where it’s not obviously illegal or heavily regulated, but they’re clearly depending on the jurisdiction.

“What you see in instances like that is the big companies stay away because there’s more to lose for them than to gain.

“These small companies go after this area ... where they effectively play this game of ‘we’re going to grow from there to a couple of billion, and sometime after zero but before we get shut down, we’ll get acquired’.”

Indeed Kothari chooses to avoid the buy now, pay later sector due to potential regulation, competition and credit risk.

“They would say they take very little credit risk, but it’s a very different investment perspective than owning a platform.”

It comes after Afterpay shares tumbled 27 per cent from a record high this month after UBS warned of regulatory risk.

UBS slapped a “sell” rating on Afterpay two weeks ago and predicted its share price would halve to $17 within a year because of issues including regulation that it has so far avoided.

The Reserve Bank subsequently said it would investigate buy now, pay later schemes such as Afterpay Touch amid concerns they were preventing retailers from recovering the high cost of the services.

The RBA’s Payment System Board said the “no-surcharge” rule could be “problematic” for retailers who felt compelled to offer the service but were unable to recoup the relatively high cost from customers. The PSB said the merchant service fees for buy now, pay later schemes were much higher than those charged by debit and credit cards.

The Sohn Hearts & Mind conference will be held at the Sydney Opera House on November 22