As investors — and employees — eagerly anticipate the imminent IPO of Chinese e-commerce giant Alibaba Group Holding, those with private shares have been marking up the value of their position.
Paul Hudson’s Greenwich, Connecticut–based Glade Brook Capital Partners, a so-called Tiger Grandcub because Hudson once worked for a direct descendant of legendary hedge fund firm Tiger Management Corp., tells clients in its August 8 letter that in the second quarter alone the firm recorded a 12 percent increase in the value of its Alibaba stake. Hudson explains that the 12 percent gain represents the midpoint of the price range calculated by New York–based corporate finance advisory firm Duff & Phelps, which Glade Brook hired to value its private investment positions on a quarterly basis.
The Alibaba investment accounts for about 5 percent of the core hedge funds’ assets and no doubt helped mitigate Glade Brook’s overall losses for the period. The firm’s two core hedge funds — Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund — fell 0.7 percent in the second quarter and were down 2.3 percent for the first half of the year. As of July 1, Glade Brook managed a total of $1.287 billion, including $903 million in the two hedge funds as well as Glade Brook Gardiners Domestic Fund, the levered vehicle it launched on March 1. It has another $384 million in its private equity funds, according to the letter.
As of June 30, the core hedge funds had a 9.1 percent exposure to private equity/pre-IPO investments, according to Glade Brook’s letter, of which Alibaba was its biggest holding. In June, Glade Brook increased its exposure to the company.
Glade Brook is not the only high-profile hedge fund firm to disclose a stake in Alibaba. We noted earlier that in its year-end letter to investors, New York–based Tiger Global Management disclosed that between September and December 2013, its hedge funds, Tiger Global and its offshore counterpart, and its private equity fund Tiger Global Private Investment Partners VII bought stakes in Alibaba. As a result, the firm owned a total of 0.32 percent of Alibaba. The stake also represented a 1.5 percent position in the hedge fund, which reported it had 6.9 percent of its hedge fund equity invested in private companies in general at the time.
Hudson founded Glade Brook in October 2011. He had previously worked for Tiger Cub Chris Shumway’s Shumway Capital Partners from 2007 through 2011, most recently as a managing director and head of the communications, media and entertainment group. Glade Brook is among at least four hedge funds Shumway has seeded since he shut down his hedge fund firm in early 2011.
In the second-quarter letter, Hudson explains that his investment in Alibaba is part of a wider play on the Internet’s transition to mobile. “In China, for example, many of the industry leaders in the PC era have successfully secured dominance in mobile after a period of heavy investment,” he writes in the letter.
Hudson singles out four companies he thinks “will generate outsized earnings growth from strong, mobile-fueled revenue and margin expansion as they harvest the significant investments they have already made.” They are Alibaba; Baidu, a Chinese search engine; Tencent Holdings, a Chinese provider of Internet services created in 1998; and Qihoo 360 Technology Co., an Internet and mobile security company in China.
Despite a setback in the stock in the second quarter, Hudson tells clients Qihoo is “the dominant mobile application delivery platform in China,” which he believes is a market that will grow exponentially “as smartphone penetration proliferates and 4G wireless networks are deployed.”
Hudson adds that the company has grown its personal computer market share of Chinese search volumes, which he expects the company to profit from. “We remain bullish on QIHU’s positioning in a sector with strong secular growth trends and believe the stock at current levels presents a compelling risk reward,” Hudson elaborates. “In our opinion QIHU will outperform in the coming quarters as the company exceeds expectations and raises forward guidance.”
From a macro standpoint, Hudson remains positive on China, downplaying the slowdown in the country’s economic growth in the first half of the year. He is confident China is beginning to stabilize, thanks to fiscal and monetary stimulus.
Hudson adds, “We remain more positive on China than consensus, in part because valuations are so cheap and in part because many of our areas of focus — such as Chinese Internet — are enjoying strong secular tailwinds, regardless of the macro environment.”
