Traditionally, hedge funds have concentrated on publicly-traded stocks. However, according to a recent report from Goldman Sachs, hedge fund participation in private deals has expanded ‘enormously’ in the last few years as fund managers aim to increase their returns.
In particular, fast-growing technology companies have sparked their interest, with hedge funds increasingly involved in private funding rounds that are normally the province of venture capitalists.
The movement of big players like Tiger Global Management and Coatue Management to the private equity field has introduced significant capital to the market and stimulated competition amongst investors. As the long-established format of private equity rapidly evolves, opportunities for profit will increasingly emerge.
What are the numbers?
Goldman Sachs’ report – ‘Hedge Funds and the Convergence of Private and Public Equity Investments’ – states that hedge funds have taken part in a record-beating 770 private deals in the first half of 2021, with an aggregate value of $153 billion.
This is a notable increase on 2020, which across the full year saw just 753 deals with an aggregate value of $96 billion. Compared to the decade prior to 2010, when hedge fund managers participated in an average of 50 private deals per year, the difference is staggering.
High value transactions
Relative to other investor activity in the private equity market, the number of deals done by hedge funds may seem small. Indeed, by number, they have contributed just 4 % of the deals done this year.
However, the value of these deals amounts to 27 % of the capital invested in private companies in 2021. Three-quarters of this capital came from just ten hedge funds. Demonstrably, hedge funds can participate in larger deals that may price out other investors.
Hedge funds are also happy for their investments to work to longer time scales than conventionally seen in private equity. Their acceptance of lower returns over a lengthier period is reshaping private equity’s customary format, driving out traditional venture capitalists and allowing companies to raise huge sums with relative ease.
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