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Hedge funds enter private equity turf with deals for unlisted companies

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Hedge funds are looking to buy in to unlisted companies, betting that an area of the markets that has wrongfooted the industry in the past can now provide them with the kind of lucrative gains enjoyed by private equity rivals.

High-profile executives such as Third Point’s Daniel Loeb, Marshall Wace’s Paul Marshall and BlueCrest Capital’s Mike Platt are among those who have spotted the opportunity. They are now seeking to invest directly in fast-growing companies, particularly in the technology sector, that are staying private for longer and can already be richly valued before they float.

Marshall Wace is launching two portfolios to invest in the healthcare and digital assets sectors, the first time it has launched vehicles for outside investors to buy into private companies. Third Point has been looking to raise about $300m for its first dedicated venture capital fund and has completed its first close, said a person familiar with the fund.

Platt, one of the world’s most successful macro traders whose firm is now a private family office, told the Financial Times that US private equity investment was now “a significant focus” for him. Paul Singer’s Elliott Management, already a longtime private equity investor, said in a letter to investors this year seen by the FT that taking stakes in private companies and public-to-private deals represented some of the best investment opportunities at the moment. 

“The best public market investors now have to be participating or at least aware of the action in private markets, or else they have a huge blind spot,” said Cutler Cook, managing partner at investment firm Clay Point Investors. “Some of the savviest investors have realised that, with public markets where they are, the opportunities to outperform are so much better in private markets.”

The interest in private assets comes on the back of huge gains reaped by some so-called Tiger cubs — protégés of Julian Robertson’s famed Tiger Management — such as Tiger Global’s Chase Coleman, Viking’s Andreas Halvorsen and Maverick’s Lee Ainslie. All are long-time backers of unlisted companies and have made tens of billions of dollars from these investments.

Many hedge fund managers, who have traditionally invested in public markets, have also been looking with envy at the returns, fees and investor inflows enjoyed by the private equity and debt industries in recent years. Assets in private capital have risen from just over $2tn in 2010 to more than $7tn at the end of last year, according to Morgan Stanley. The hedge fund industry has grown from $1.9tn to $3.6tn over that period, according to HFR, and performance has often been lacklustre.

This is not the first time that hedge funds have expanded into private equity and unlisted companies. Before the 2008 financial crisis some managers bought into private companies to juice up returns. That move backfired spectacularly when the crisis hit and many such assets became tough to sell, just as investors were demanding their money back.

Some managers put these assets into special vehicles, which often took years to wind down. Last year, the FT reported that a GLG Partners fund created out of assets bought by star manager Greg Coffey before the crisis, including a large stake in a Siberian coal mine, had only recently made the final payments back to investors.

This time, managers argue that funds have done a better job matching the assets they hold to investors’ ability to withdraw their cash. And while some funds have put the investments into their more liquid hedge funds, others such as Coatue and Tiger Global have gone on to develop separate private equity funds with longer investor lock-ups.

A key reason for investing in both public and private companies is the additional information hedge funds believe they can glean, which can help inform other investment decisions. Unlike public companies, which are subject to strict reporting rules, private companies can provide them with much more information, not only on their own performance but also on metrics such as sales and margins across the sector.

“If you analyse public and private companies, you see the whole picture,” said Christian Vogel-Claussen, managing partner at London-based hedge fund Alanda Capital. The firm, which takes a similar investing approach to some of the Tiger cubs, has bought into companies such as debit card company Marqeta, TikTok owner ByteDance and digital banking firm Revolut.

Third Point founder Loeb wrote in an investor report seen by the FT that “the feedback loop between private and public markets has never been as pronounced as it is today”.

Managers also argue that by investing in private companies they can get ahead of overcrowded IPOs. Some have found more opportunities to do so during the coronavirus pandemic, when the economic hit from lockdowns put off some private equity firms from committing capital. New York-based hedge fund Kora Management, for instance, said it was able to invest in Indian food delivery company Zomato in the third quarter of last year when “the capital cycle was not as favourable”. The stock soared on its debut in July.

“At an IPO there’s little chance, as a hedge fund, to get an allocation — therefore you must have exposure earlier,” said Alanda’s Vogel-Claussen.

Cédric Fontanille, head of investment mandates at Unigestion, said hedge funds had identified a “sweet spot” in smaller private firms “that are outside the range of the big private equity funds and are maybe a little less looked at by private equity”.

However, some in the industry see more pragmatic reasons for the switch into private investments.

Whereas hedge funds can be undone by one bad trade or quarter of performance, private equity managers lock up investors’ capital for far longer and are judged over much longer periods. According to one industry insider, taking such a long-term approach offers far less “career risk”.

Additional reporting by Miles Kruppa in San Francisco

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