When social media giant Facebook went public in May 2012, it was one of the most anticipated initial public offerings since the dot-com boom of the late 1990s. Although the stock finished its first day of trading roughly unchanged from its initial offering price, Facebook did wind up setting a record for trading volume for a new issue.
However, at least two hedge funds had long invested in the company before its public debut.
Christopher Hansens San Franciscobased Valiant Capital Management invested a total of $31.6 million in Menlo Park, Californiabased Facebook in September and October of 2010, while Christopher Shumways Shumway Capital Partners, based in Greenwich, Connecticut, made a private $10 million investment in the company in January 2011, an initiative led by Paul Hudson, who eventually left the firm to start his own hedge fund firm, Greenwich-based Glade Brook Capital Partners.
Valiant cashed out of its investment in January 2013 for $59.5 million, for a net internal rate of return of 31.2 percent.
Many hedge funds reacted to this win and other private deals at the time and began to ramp up their own investments in private companies.
So, by the time Chinese e-commerce giant Alibaba went public in its own highly anticipated IPO in September 2014, at least five Tiger Cubs firms with some affiliation with Julian Robertson Jr.s Tiger Management had at one time or another held private shares. This group included New Yorkbased Tiger Global Management; Greenwich-based Viking Global Investors; Valiant; New Yorkbased Falcon Edge Capital; and Glade Brook, which had created a separate venture capital fund Glade Brook Private Investors to invest in Alibaba.
In the past few years, the trend of hedge funds investing in private companies has grown, with some launching separate venture capital funds. Thats a subject we will explore in this, the fourth of a five-part series examining the phenomenon of hedge funds and tech investing.
Also from this series:
- Tech Stocks on the Edge of a Nervous Breakdown
- Hedge Funds and Tech Stocks: A Tighter Focus, a Wider Search
- Hedge Funds and Tech Stocks: Dump the Old, Embrace the New
- Hedge Funds and Tech Stocks: Tiger Global's Commitment to Tech
Managers say the growing interest in private companies is in part because many technology and related start-ups delay their IPOs, forcing investors to seek out less liquid opportunities if they want a piece of tomorrows leading companies. Much of the innovation and growth is investable as a private company, says one hedge fund manager who has made a big commitment to this universe.
Changes in the marketplace, such as the delay in companies going public, demand that we remain active in the private space to enhance our public activities, Viking wrote in its 2014 second-quarter letter when it announced the January 2015 launch of a new fund, Viking Global Opportunities, a liquid-illiquid or so-called hybrid fund designed to accommodate illiquid securities.
We believe that we make better investment decisions across the board by studying new entrants and periodically investing in them, although they may not be listed, Viking added in the 2014 letter. We often find that private companies develop disruptive business models and new technologies that directly impact our public positions.
Tiger Global Management has built an entire venture capital business with more than $10 billion in capital. The firm also invests a small percentage of its capital in private companies. According to its recent semiannual letter, dated July 31 and obtained by Institutional Investors Alpha, since 2003 its nine private funds have invested some $9.2 billion in 201 companies in 30 countries.
A large number of these investments have been made in India and China.
Tiger Globals two largest holdings among the private funds are Flipkart, an Indian e-commerce giant owned by five of its nine funds, and OlaCabs, known as the Uber Technologies of India and owned by three of its funds. The firm described Flipkart as a top e-commerce company and third-party marketplace.
Glade Brook, which began raising money for Glade Brook Private Investors VI earlier this year, had already raised money for Glade Brook Private Opportunities Fund and Glade Brook Private Investors IV. Glade Brook Private Opportunities Fund, which plans to focus on four to six big global ideas over the next 24 months, has so far invested in at least two companies: Uber, the San Franciscobased ride-sharing service, and Snapchat, the messaging company based in Venice, California.
Glade Brook Private Investors IV was created to invest just in Snapchat; Glade Brook Private Investors V for Uber; Private Investors III for Koudai Gouwu, which the firm describes as one of the fastest-growing mobile e-commerce companies in China; and Glade Brook Private Investors II for Broadcasting Media Partners, the parent company of Univision Communications, the Spanish-language media company.
At the end of the second quarter, 25 percent of Valiant Capitals roughly $2.5 billion invested in its hedge funds were in side pockets, which is how it defines private investments. At the end of the second quarter, it had nearly three dozen separate open investments, several of them in the same company.
For example, in December 2014, Valiant made a nearly $18 million investment in Uber.
Valiant has also made at least two investments in Pinterest, the hot San Francisco arts and crafts and social media company, and Dropbox, the San Franciscobased online file-sharing company. Valiant says that its May 2014 investment in Pinterest had more than doubled by the end of June 2015.
Falcon Edge has seen its more than $93 million invested in seven private companies since April 2014 grow in value to more than $200 million, as of the end of May, according to the firms May 2015 client report. The firm, founded in 2012 by Richard Gerson, who is a so-called Tiger Grandcub because he was previously a founding executive at John Griffins New Yorkbased Blue Ridge Capital (Griffin worked at Tiger Management before founding Blue Ridge), does not identify the names of the private companies in which it has invested. It refers only to the companys home country and industry. Of the seven, Falcon says one investment, which it calls a Chinese communications company, has grown about five times in value.
However, according to public searches, Falcon Edge reportedly invested about $20 million in Ola. The firm also led a new, $40 million fundraising round for NewsHunt, which it described as an India-based mobile news aggregation service.
Falcon Edge also participated in a $60 million funding for Foodpanda Group, a Berlin, Germanybased company with operations around the world, which helps people order food for delivery from a phone app, and participated in a $350 funding round for Koudai Gouwu and in a $90 million financing for Mumbai, Indiabased Locon Solutions, which operates an online housing portal.
Other hedge fund managers that have created separate vehicles to invest in private companies include Philippe Laffonts New Yorkbased Coatue Management and Lee Ainslie IIIs Dallas-based Maverick Capital.
Meanwhile, Stephen Mandel Jr.s Greenwich-based Lone Pine Capital, which does not generally invest in private companies, did make an exception late last year for Uber.
And, more recently, Tiger Management participated in a $17.6 million round of financing for New Yorks Exosome Diagnostics, which develops and commercializes blood-based cancer diagnostics.
Ricky Sandlers New Yorkbased Eminence Capital, which is not part of the Tiger network, in July led a Series C funding round for Santa Monica, Californiabased Whipclip, an online and mobile application platform for the legal sharing of short video clips of live television and music videos. Sandler told clients in a letter that researching and analyzing private companies, especially technology companies, is an increasingly important part of staying on top of new trends and significant developments, whether for potential new investments or to monitor portfolio positions.
He assured his investors, however, that this strategy would not become a big part of the firm. To be clear, we do not expect investments in private companies to become a material part of our portfolio or a major focus of our research efforts over the near term, Sandler wrote. Generally, valuations of private companies in the technology world strike us as irrationally high, and we would expect our bar to remain very high in this area.
Next week we will take a look at how Tiger Global Management has built two large but separate businesses, one for hedge funds and one for venture capital, and how they relate.