Goldman says hedge funds like Tiger International compete extra strongly with VCs

Justin Chin | Bloomberg | Getty Images

The involvement of hedge funds in private transactions, which typically involve venture capital and private equity firms, has increased “tremendously” in recent years as fund managers seek to increase their returns, according to a report from the Goldman Sachs sales and trading desk .

Hedge funds, which have traditionally invested in publicly traded stocks, have become increasingly interested in private funding rounds from fast-growing technology companies in recent years, Goldman said.

The report, titled “Hedge Funds and the Convergence of Private and Public Equity Investments,” shows that hedge funds have participated in a record 770 private deals worth $ 153 billion since the beginning of the year.

By comparison, hedge funds participated in 753 deals in 2020 with a total value of $ 96 billion.

In the decade leading up to 2010, hedge fund managers engaged in just over 50 transactions per year on average, with a high of 117 transactions in 2007.

Big sums involved

The number of transactions carried out by hedge funds remains small compared to the activity of other investors in private markets. According to Goldman, hedge funds have only been involved in 4% of transactions so far this year.

However, the footprint of hedge funds has grown large. They have invested 27% of the capital employed in private companies so far this year, which reflects their tendency to invest in larger businesses.

Three-quarters of the capital came from just 10 hedge funds, Goldman said.

In fact, Tiger Global Management and Coatue Management are just two hedge funds that are aggressively competing in private deals with venture capitalists from Silicon Valley and other investors.

Tiger Global invested in over 20 European startups in 2021, up from four in 2020, data from VC analytics firm Dealroom shows.

Billions of dollars have already been pumped by hedge funds into start-ups like London-based fintech Revolut and US business software company Databricks this year.

Job van der Voort, CEO and co-founder of HR start-up Remote, told CNBC in July that there are “many new players in the market” and that it is relatively easy for some companies to raise huge sums of money.

“We could have given almost any number and would be able to raise the amount of money,” said van der Voort, whose company raised $ 150 million on a valuation of $ 1 billion in the summer.

“Back in the day, funding startups, especially early stage startups, was something that was reserved exclusively for venture capitalists, and what you are seeing now are these next few companies like Tiger and SoftBank that like to make smaller returns over time and that makes them very competitive, “said van der Voort.

“Basically, you can say we’re going to fund a lot of different startups at very high ratings and supplanting all traditional venture capitalists.”

Global outlook

Most hedge fund investments involve US companies, but Goldman said it has seen an increase in the proportion of investments in companies headquartered in APAC, particularly China, while the proportion of transactions in EMEA has remained relatively unchanged.

The vast majority, 72% of private hedge fund deals, are in the venture capital space, Goldman said, adding that 44% can be classified as late-stage and growth equity deals.

Of the 1,500 companies in Goldman’s sample that are currently owned by hedge funds, 79% have only one hedge fund manager as a current investor, while 3% have more than four hedge fund managers investing.

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