IN Silicon Valley, hedge funds with billion-dollar reserves are becoming the new venture capitalists.
Tiger Global, a US$20 billion investment firm started by Chase Coleman as a hedge fund, is one of three investors that has helped Nubank, a digital finance company in Brazil, raise tens of millions of dollars.
Lee Ainslie’s US$10.5 billion hedge fund, Maverick Capital, is likewise dabbling in private start-up funding, as one of three investors in Vserv, a digital platform for mobile marketing and commerce in India and South-east Asia that has raised more than US$10 million.
Lending Club, an online marketplace that matches people who want to borrow money with people willing to lend it to them, counted Coatue Management, a hedge fund and private equity fund, as one of its investors before its initial public offering in late 2014.
All three hedge funds have something else in common: They are part of a successful network of so-called Tiger cubs, managers that got their start from the billionaire trader Julian Robertson, who made his mark picking stocks. His Tiger cubs have also struck gold. Many of them have ventured away from betting on publicly listed companies to taking stakes in private startups.
Other investment firms, too, are pouring tens of millions of dollars into Silicon Valley. Much of that money is going to companies that focus on financial technology – called fintech – which includes new ways to replace traditional banking using the Internet and automation. Last year, funding for fintech startups more than doubled, reaching US$12.2 billion, compared with US$5.6 billion in 2014, according to a report from PricewaterhouseCoopers.
“There was a huge wave in 2013” of hedge funds and other alternative investment firms shifting into the fintech space, said Fiona Grandi, a financial services fintech leader at KPMG. After the 2008 financial crisis, banks around the world reduced lending and other services. The Internet and smartphones have allowed new players to step in and provide those services directly to consumers without using traditional banking platforms.
Investor enthusiasm for the fintech sector has helped push valuations higher, with several startups reaching the milestone “unicorn” status, referring to valuations of US$1 billion or more.
“If you were to step back and just look at what has happened in terms of banking – with the unbundling of the banks, we’ve watched venture capitalists pour in money, and we’re seeing the number of ‘unicorns’ marching towards going public increase,” Mr Grandi said. “There is tremendous movement in this space, and it’s not surprising that hedge fund managers want to capitalise on this.” Third Point Ventures, the venture capital arm of Daniel S Loeb’s US$16 billion hedge fund Third Point, has made 38 investments in United States tech startups since 2000. One of the three fintech startups it has backed is SoFi – short for Social Finance – an online provider of loans, mortgages and student loan refinancing.
Passport Capital, the US$4.4 billion hedge fund run by John Burbank, has made a dozen investments in United States tech startups, according to the research firm CB Insights. Passport’s fintech investments include CashStar, the maker of prepaid cards for retailers and restaurants, and Prosper, the online marketplace lender.
The pace of fintech investments by hedge funds picked up in 2014, said Matthew Wong, a data analyst and researcher for CB Insights. The initial flood of money into Silicon Valley fintech startups from hedge funds started two years earlier and was focused on marketplace lending. Now, this money is starting to move into other fintech areas like insurance and management systems for small businesses.
Lure of fintech
Tiger Global, a major investor in Silicon Valley, has also ventured overseas to make bets on fintech companies. In Australia, it has backed Tyro Payments, a company that provides banking solutions for small businesses. In India, it has investments in Razorpay Software, which offers secure online payments systems for businesses, as well as Policybazaar, a website that compares insurance options. In addition to Nubank, in Brazil it has backed ContaAzul, a management system for small businesses to control their finances and sales.
A booming Silicon Valley has allowed many hedge funds to shift their focus away from traditional investing strategies that in recent years have resulted in disappointing performance.
But with so much money rushing into the space, some observers warn that some companies might be getting more credit than they deserve.
“I think there’s the short-term cycle and then there is the long-term shift that’s happening,” said Nick Shalek, a partner at Ribbit Capital, a venture capital firm that has focused on fintech since its founding in 2012. “Fintech has been one of the shiniest objects around in recent years. Some of these investors will get spooked in the next year or two, but the bigger trend is that companies are changing their behaviour and transforming how financial services are delivered.” Hedge funds with little experience or expertise in venture investing risk getting burned, said David Snow, chief executive of Privcap.
“The last time hedge funds were encroaching on private equity territory in a big way was in 2006 and 2007, just before the financial collapse,” he said. NYT