For some of the world’s largest hedge funds, private equity ended up making -- or saving -- the year, and they’re betting that will be the case again in 2022.
Those with big holdings in non-public enterprises were rewarded in 2021 as a record number of companies debuted on U.S. exchanges, allowing the asset managers to realize gains.
Deep-pocketed investors have been flocking to private companies because stakes can be acquired relatively cheaply.
“Entering early allows us to acquire significant ownership in great companies at an entry price that is a small fraction of their ultimate public valuations,” Third Point’s Dan Loeb wrote in a first-quarter letter to clients.
His offshore fund climbed 25.7% through November and his top three money-makers were companies that Third Point invested in while they were still private and then went public within the past 13 months: Upstart Holdings Inc., SentinelOne Inc. and Rivian Automotive Inc.
Dan Sundheim’s D1 Capital returned 17% through November in a fund that can invest as much as 35% of its assets in private companies. It would have struggled without them.
That private investments made such a difference for so many managers might be surprising given how well public markets performed this year, with the S&P 500 climbing 28% through Wednesday. Yet surging stock prices were little help to managers who backed the wrong companies or were ensnared in violent short-squeezes.
Gabe Plotkin’s Melvin Capital Management was one fund that got caught flat-footed, stung by wrong-way short bets on companies including AMC Entertainment Holdings Inc. and GameStop Corp., which skyrocketed during the late January meme-stock frenzy. His $11.5 billion firm rebounded 28.5% from its January lows, though it was still down about 42% for the year through November.
Chase Coleman’s Tiger Global Management and Philippe Laffont’s Coatue Management incurred losses on Chinese technology and consumer stocks that swooned amid a regulatory crackdown by Beijing.
‘Be Careful’
A reliance on private investments should give investors pause, said Chris Walvoord, global head of alternatives research at Aon Plc.
“Everybody needs to be careful shifting into this direction,” he said, noting that funds more heavily weighted with illiquid private investments are at greater risk if something goes wrong. “If a quarter of your investors ask for their money back, you’re going to have to shut things down, because it’s going to completely unbalance the portfolio.”
Some funds, meanwhile, did just fine sticking primarily or solely with public stocks.
That includes Senvest Management, run by Richard Mashaal and Brian Gonick, whose $3.3 billion fund returned 75% through November, helped by a big bet that GameStop would jump, as well as wagers on Canadian energy companies. The firm also profited by shorting Chinese education company Gaotu Techedu Inc., which tumbled when Bill Hwang’s Archegos Capital Management was forced to unwind its positions.