Hedge Funds Increase Bets on Private Companies
Viking, Maverick look to stand-alone private-equity funds, while Anthony Scaramucci pitches Klarna
Hedge-fund firms are stepping up their presence in what has emerged as Wall Street’s hottest area: investing in private companies.
Viking Global Investors LP, Maverick Capital Ltd., Lone Pine Capital LLC and others have taken steps recently to increase their investments in private companies. Viking, a large investor in private healthcare and biotechnology companies, is aiming to raise $1 billion from investors for its first dedicated private-equity fund, said potential clients. The new fund is expected to close on Oct. 1.
Some hedge funds have been investing part of their money in private companies for years, saying they would miss out on opportunities to profit otherwise, given that companies are staying private longer. But interest from hedge funds has soared recently as profits have proliferated and companies have gone public at a rapid pace.
For the year through Friday, more than $312 billion of registered equity offerings through initial public offerings, special-purpose acquisition companies and follow-on deals came to market in the U.S., according to Dealogic. That figure is more than the annual average of nearly $290 billion that came to market in the U.S. over the decade ended 2020.
“There is huge demand,” said Jason Kaplan, a partner at Schulte Roth & Zabel LLP, who said he has been having multiple conversations a week with hedge-fund managers interested in discussing ways to invest in private companies. “They believe in the ability to drive returns and also mitigate some of the risks of public markets.”
There are concerns about the strategy given there is no guarantee investor appetite for tech companies and new offerings will continue. Activity in SPACs has slowed recently, and the stock prices of many newly listed companies have dropped below their IPO prices.
In addition, hedge fund clients continue to worry about the liquidity of investments. In the 2007-08 financial crisis, many clients were surprised by the amount of investments their managers had that were or became illiquid, limiting their ability to get their money back.
Craig Bergstrom, of the $8 billion hedge-fund investor Corbin Capital Partners LP, said of hedge funds investing in private companies: “It’s not inherently a good idea—it’s not, ‘How do I buy as much of this as possible?’ But there are some players we’ve seen execute on it very successfully.”
Among those looking for gains is Maverick, fresh off a large profit in its near decadelong investment in South Korean e-commerce giant Coupang Inc. CPNG 5.88% The firm has told investors it plans to start a late-stage growth fund.
Lone Pine is increasing to 15% from 5% the amount its hedge fund and long-only fund can invest in private companies, with investors opting into the increased exposure. Flight Deck Capital LP, a San Francisco fund started by Jay Kahn, launched May 1 with $250 million and the ability to invest a quarter of its assets under management in private companies. Mr. Kahn previously led or co-led most of the private investments at Light Street Capital Management and also invested in public companies.
Private investments have gained in popularity as several hedge-fund firms with significant private-investing efforts have posted some of the best returns in the industry. Tiger Global Management LLC, a pioneer in the hybrid approach that began investing in private companies in 2003, Coatue Management LLC and D1 Capital Partners LP have all boosted their returns by investing in private companies.
Fund managers say that they are being selective about which companies they back and that liquidity in secondary markets has increased in recent years.
Managers and their advisers also say the circumstances are different than those leading into 2008. Managers say they generally are more upfront about how much they intend to have in illiquid private investments and regularly communicate about those wagers with their clients. Funds recently have been structured from the outset to accommodate the longer time it can take to exit private investments.
For some managers, private investments also offer a chance to charge higher fees.
Anthony Scaramucci’s SkyBridge Capital, which invests billions in hedge funds for wealthy individual clients, has created special-purpose vehicles dedicated to investments in private companies.
In one recent deal, SkyBridge offered potential clients stock in Swedish payments company Klarna Holding AB for a 7.5% placement fee and 20% performance fee, according to documents viewed by The Wall Street Journal. In contrast, the maximum fees SkyBridge charges on its fund-of-funds products, which give investors exposure to a portfolio of hedge funds, are 1.5% for management fees and 10% for performance, a recent regulatory filing said.
A person familiar with the deals said the fees reflect the scarcity of such investment opportunities for wealthy individual investors.
Navigating private investments can be tricky, depending on funds’ structuring. At Maverick, Coupang’s growth and longtime status as a private company complicated matters.
In 2019, Maverick told investors that those who redeemed their investments from its hedge funds would receive cash, plus interest in a holding company dedicated to Coupang that would be converted to cash when Maverick sold its Coupang stake. Investors typically prefer receiving cash. Maverick’s hedge funds also were largely prevented from investing in other private companies because of Coupang.
Coupang’s public offering in March contributed to Dallas-based Maverick’s best quarter ever. The less than $20 million investment was valued at about $3.9 billion at the time of Coupang’s IPO.
Maverick founder Lee Ainslie on an investor call in May said the firm’s new late-stage growth fund, expected to raise $500 million, would help enable Maverick to invest in a company throughout its life cycle. Maverick hedge-fund clients also were told they could opt into or out of private investments in its hedge funds going forward.