Hedge Fund Losses Hasten Tiger Global’s VC Transformation
- Private Equity
- December 30, 2022
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(Bloomberg) — Tiger Global Management started out as a traditional stock-picking hedge fund that dabbled in venture investments. Now, after a tumultuous 2022, its startup bets outstrip equities more than ever before.
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That transformation helped the money manager weather its worst year on record, as Tiger Global’s traditional hedge fund lost more than half of its value. Its long-established venture unit grew exponentially over the past two years, insulating the firm from even steeper losses, as such private investments are less susceptible to declines in public equities or the short-term whims of clients.
The hedge fund tumbled 54% through the first 11 months of this year, on track for its worst annual performance, while its long-only fund plunged more than 60%, fueling a $42 billion drop in total assets. Those staggering losses have tipped the balance further in favor of the VC funds, with Tiger Global managing almost three-quarters of its $58 billion in the private portfolios as of September.
“Every hedge fund is envious of private equity and venture capital,” said Andrew Beer, founder of Dynamic Beta Investments, which seeks to replicate hedge fund returns. “With long lockups and high fees, the latter are much harder to kill during a rough period.”
This story is based on conversations with multiple people with knowledge of Tiger Global, which declined to comment.
Chase Coleman launched the New York-based firm in 2001 with a $25 million check from his former boss, Tiger Management’s Julian Robertson. Tiger Global started a long-short equity hedge fund focused on tech stocks and began investing in private companies a year later.
Assets swelled into the billions, with early wagers on Alibaba Group Holding Ltd. and JD.com Inc. proving to be big hits when those Chinese firms went public. That success attracted more venture investments, and Tiger Global’s startup bets accelerated rapidly in recent years.
Until 2020, the money manager’s assets were split roughly evenly between its equity and VC funds. That changed last year, after the firm marked up its private portfolio companies and a flood of cash flowed into the venture funds.
Tiger Global made 683 venture and private equity investments since the start of 2021, more than the previous eight years combined, according to PitchBook data. Last year, venture chief Scott Shleifer began a fundraising push in earnest, paying above-market salaries to hire dozens of investor-relations staff to scout the market and raise cash for its biggest-ever venture fund, along with its hedge and long-only products.
Those efforts paid off.
Tiger Global raised almost $13 billion for the venture fund, a cash pile that grew when the firm also began fundraising from affluent individuals. JPMorgan Chase & Co. wealth clients began to invest in the venture funds last year, and Tiger Global more recently partnered with Morgan Stanley — replicating the downstream move by private equity giants such as Blackstone Inc. to raise more cash from retail investors.
Heading into 2022, Tiger Global bet big that stocks would climb and China would rebound, borrowing money to boost the wagers. Those wrong-way calls led to a reckoning in the funds, further shifting the balance between the firm’s private and liquid assets.
That has led to some notable operational changes. Coleman has been participating more frequently in meetings with startup founders, people said. As losses mounted, he vowed to clients that he’d work to recoup their money and their trust.
“We take very seriously that our recent performance does not live up to the standards we have set for ourselves over the last 21 years and that you rightfully expect,” the firm wrote in a June letter to investors. “Our team remains maximally motivated to earn back recent losses.”
Earlier this year, Tiger Global raised its biggest-ever venture vehicle, attracting $12.7 billion for its Private Investment Partners 15 fund to invest in consumer and tech startups with a focus on India. Historically, insiders led by Coleman and Shleifer accounted for at least 7% of all assets in these vehicles, people familiar with the firm said.
Last year, the pair pulled billions of their own dollars from the hedge and long-only funds to make their usual allocations to Tiger Global’s new venture funds, which is standard practice for the principals.
Because the two have most of their net worth tied up in the firm, and the hedge and long-only funds are their main source of liquidity, they typically pull their money from those vehicles to do so, the people said. Making that move in 2021 ultimately saved them from record declines in both funds. This year, in the wake of that swoon, the partners pumped hundreds of millions of their own money back into the public equity funds.
The past year marks a stunning reversal for a firm that reached $100 billion of assets in 2021, following the huge gains in public and private companies a year earlier.
Coleman and Shleifer made a series of changes in an effort to stem this year’s losses. Tiger Global revamped its hedge fund, paring stock exposure, cutting China wagers and ramping up short bets. By June, the firm had to side-pocket venture investments in its hedge fund that had grown too big as stocks fell. It cut the funds’ management fees to compensate.
Last year, on the venture side, the firm began transitioning from later-stage growth equity bets to earlier VC wagers. It actively slowed its venture investments in 2022, curtailing their size and number, as it continued the shift to startups that aren’t close to going public.
“The crossover model is not going away, but the bar has gone up to do either successfully,” said Ilana Weinstein, founder of recruiting firm IDW Group, referring to money managers that do both hedge and venture investing. “A machine-gun approach to spraying capital to get into private deals is no longer going to work. Funds will have to prove their ability to assess what valuations are palatable as well as their ability to protect risk in their public books.”
Despite the magnitude of the hedge fund’s losses — which have far outstripped those of their peers — investors appear to be giving Tiger Global time to recoup losses and aren’t pulling money en masse. The firm has net inflows for the year, and some clients are even looking to reinvest, people said. Still, some wonder how it will retain talent in a competitive market while charging reduced fees.
Tiger Global has a long way to go before it can start charging full fees again on its equity funds, making it all the more important for the venture investments to succeed.
But that side of the firm also hasn’t escaped the tech sector’s troubles. Tiger Global marked down the value of those assets by 24% this year, as startups struggled with surging inflation, rising interest rates and the threat of a recession.
Now Tiger Global is seeking to raise $6 billion for its next VC fund — PIP 16 — down from an initial target of $8 billion. So far, investor appetite has been weaker than expected and some who initially indicated interest have put things on hold amid a tough fundraising environment.
Tiger Global’s consistent focus on tech and consumer companies — whether public or private — limits its ability to be more flexible and try other sectors, said Dynamic Beta’s Beer.
“Their clients expect them to stick to their knitting,” he said. “So if tech stocks languish for a decade, it will be very difficult for them to pivot.”
(Updates with additional context in first few paragraphs)
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