Hedge funds’ private eye
For hedge funds competing with venture capital and private equity, it’s increasingly becoming a case of “if you can’t beat ’em, join ’em”.
A new wave of investors led by the likes of Tiger Global Management, Coatue Management and Altimeter Capital Management are elbowing their way into Silicon Valley at an unprecedented pace, with a record-smashing $153bn worth of investments in private companies by hedge funds in the first six months of 2021.
Data from Goldman Sachs Prime Services highlight how hedge funds, typically known for investments in publicly traded assets, have been drawn to private markets in an effort to fire up largely lacklustre returns.
It also shows how private equity and venture capital have exploded in popularity over the past decade, particularly within the past three years. The asset class has soared to more than $7tn in value and is expected to double again by 2025, while the number of US public companies has roughly halved since 1996.
All in all, it’s resulting in increasingly blurry lines between different asset classes, said Diana Dieckman, Goldman’s global head of capital introduction in prime services.
The biggest players such as Tiger Global and Coatue have raised billions of dollars for dedicated venture capital and private equity funds — separate from their traditional, evergreen hedge funds — helping to fuel the steep increase in dealmaking this year. Tiger Global is now attempting to raise a record $10bn fund for venture-style investments.
It’s worth noting that only a relatively small set of hedge funds are responsible for these private investments, with 75 per cent of the capital invested by just 10 firms.
Competition is also an issue. Roughly three out of every four private deals done by hedge funds are in early-stage companies, and there’s a record amount of private capital looking to invest in start-ups.
In Silicon Valley, where venture capitalists have marked their turf, hedge funds’ two-pronged pitch to companies is this: they can hold their shares well beyond a public listing, a point at which many VCs drop off, and coach executives on the ins and outs of being a public entity, according to Goldman.
Based on the sheer amount of capital flooding into an industry that has been culled over the past decade, that pitch appears to be working.