Venture investments: first hedge funds have drowned Valley in money, but now everything is different
The volume of investments from hedge funds in venture technology projects has dropped to its lowest level in 3 years.
In recent months, venture investment companies (VC) and mutual investment funds have become much more careful in choosing technology projects that they will finance. Now hedge funds, whose investments have contributed to the growth of the sector’s capitalization to the maximum values of the dot-com times, are also becoming more selective.
Last month, hedge fund participation in venture projects in the US technology sector has fallen to its lowest level since 2013. According to data from PitchBook Data Inc., only 2 deals were made. Even the fund Tiger Global Management LLC (assets under management of 20 billion dollars), which made investments in Facebook and LinkedIn in the initial stages of development, decided to postpone investments. And smaller funds rush to get out of technological projects.
Like VC, hedge funds have become more cautious in choosing projects due to the fact that some startups have not been self-sufficient. Fears added by disappointing IPO technology companies, due to which more and more firms prefer to remain private for a longer time. And this means that in some cases the funds will have to wait longer in order to exit these projects with a profit. Investor caution provokes startups to cut costs, lay off employees and accept tougher financing terms.
“We stopped the investment of private technology companies”- Jeremy Abelson, portfolio manager from a small hedge fund, Irving Investors, New York, said in an interview.
“I’m tired of evaluating intangible assets, I also don’t like the uncertainty about withdrawal from the project, the uncertainty about the liquidity of assets. Even if I decide to finance such projects, I will not invest large sums. I am interested in projects with immediate profitability. ”
Hedge funds have reduced their participation in financing venture projects from 3 to 4 quarter 2015 by 38%, according to PitchBook data. The volume of transactions decreased from 9.1 billion dollars to 4.6 billion dollars in the same period. The reluctance to invest in projects is particularly noticeable at the final stage of financing technology companies, which has caused an increase in the number of so-called roundings (a situation in which startups agree to a lower estimate of their value in exchange for providing investments). The volume of transactions at the final stages (E-series or later) of financing based on lower valuation rose to 26% in the 4th quarter of last year compared to 11% a quarter earlier, according to Fenwick and West LLP .
In past years, hedge funds lacked the patience to evaluate technology start-ups, risky investments in which can pay off over the years. However, the latest generation of companies in the Valley are engaged in real business (unlike their predecessors of the dot-com era), and hedge funds have to compete with VC in order to conclude the largest and most profitable deals. For example, Coatue Management LLC, a fund that invests in private and public companies, led a campaign to raise funding for Snapchat, which totaled $ 55 billion. Valiant Capital Partners invested in Pinterest, Dropbox and Evernote. Some smaller funds attracted high profitability of large firms, for example, a profit of $ 3.2 billion, obtained by Silver Lake Management LLC after the IPO of Alibaba Group Holding Ltd. last year.
“Market events affect the arrival of players who invest only in cases when everything is good”- said Ben Narasin, a partner in Canvas Ventures, California (a venture fund whose partners invested in projects like Lending Club and Houzz) at a press conference.
"Everyone is attracted by the new shiny toy."
But in recent months, some startups have decided to postpone the IPO after the negative dynamics of some companies that have become public. Etsy Inc. lost half its value since the IPO, which took place last year. Companies Square Inc. and Match Group Inc. managed to attract a lot less money than they expected. The placement price of Square’s shares during the IPO ($ 9) turned out to be much lower than the price of 15.46 dollars per share, at which the company sold its shares during the last private investment. Match quotes are traded below the IPO price.
In 2013, investors in the technology sector could expect an average return on their investment of 160% (from the last round of private investment to an IPO), according to data from Irving Investors, obtained from BVMarket Data . In the second half of 2015, the average yield fell to 29%.
However, large hedge funds have not left the US technology sector. They just became more selective. For example, Tiger Global Management, which is positioning itself as an investment fund with a separate venture capital unit, invested in 4 projects in the USA in 2015 compared to 12 a year earlier, according to data from CB Insights . (The data does not include Tiger’s purchase of a large stake in Uber, which took place last December, since the transaction has not yet been closed).
In 2014, Dragoneer Investment Group invested in 4 technology start-ups in the US, and last year only one (Dollar Shave Club), according to CB Insights . In 2014, Valiant funded 2 projects (Instacart and Uber), but last year the fund did not invest in technology projects in the United States.
“This asset class is illiquid”- said in an interview with Ilan Nissan, a partner in Goodwin Proctor (consultant for hedge funds and VC).
“If you want to invest in this area, then you need to be prepared to sit in the offices of these companies and know how the value of your investments changes every day. The IPO market is very volatile, and most likely, investors will for some time beware of these assets. ”