Seemingly every person on the unofficial who’s who of hedge fund managers owned shares of Alibaba Group Holding at the end of September, including O. Andreas Halvorsen of Viking Global Investors, Daniel Loeb of Third Point and David Tepper of Appaloosa Management.
However, one investor who is conspicuously missing from the ranks of Alibaba shareholders is a firm that had a sizable investment in the Chinese Internet giant before it went public — Tiger Global Management. That’s at least according to the firm’s 13F disclosure of stocks it owned as of the end of the third quarter.
According to these disclosures, the New York investment firm founded by former Tiger Management technology analyst Charles “Chase” Coleman III, which manages hedge funds and private equity funds, did not own any shares of the Chinese e-commerce giant.
Was this another case of “selling on the news,” unloading the stock when everyone else piled in during the most celebrated IPO in years? After all, we had earlier reported that in its 2013 year-end letter to investors, Tiger Global 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 funds.
We also recently reported that the Tiger Global hedge funds’ best-performing position in the third quarter was Alibaba. And the hedge funds, headed by Feroz Dewan, seemed strongly committed to Alibaba in the firm’s third-quarter letter to investors in the funds.
The letter stated: “Given China’s fragmented offline retail footprint and the increasing adoption of mobile commerce, we remain excited about the long-term growth prospects of many e-commerce businesses in China, including Alibaba.”
Apparently, Tiger Global has not yet converted its private shares to the publicly-traded American depositary shares (ADSs), so it does not need to disclose this stake. It also appears that Tiger Global did not buy additional shares at the IPO or shares traded afterwards. Tiger Global declined to comment on its Alibaba holdings.
In any case, keep in mind that over the next year there are several major lock-up expiration dates for a large number of Alibaba shares issued before the IPO — in December 2014, and in March and September 2015. It is not clear whether Tiger Global’s shares are now subject to lockup and, if so, which expiration period its shares are subject to.
The situation is different with another Tiger Management descendant that owned a position in Alibaba before the IPO. Paul Hudson’s Greenwich, Connecticut-based Glade Brook Capital Partners says in its third-quarter client letter dated November 11 that its private equity strategy made its initial investment in Alibaba in 2012, while the firm’s core hedge funds took their first long position in the company in January 2014.
Glade Brook’s private Alibaba investment accounted for about 5 percent of the core hedge funds’ assets at the end of the second quarter, according to its letter sent to clients at the time.
In the third quarter, Glade Brook says, direct and indirect positions in Alibaba accounted for roughly 7 percent of core hedge fund assets. “In addition, we held shares not subject to lock up,” it adds.
Glade Brook explains in its report that the shares will become liquid during the first quarter of 2015 or shortly afterward. Still, in its 13F filed last week, the hedge fund disclosed that it owned nearly 1.6 million shares of Alibaba, accounting for nearly 14 percent of its assets, making the company its largest holding. Glade Brook would not comment on its holdings.
In any case, in the third-quarter letter, Hudson tells clients that despite the rapid runup in Alibaba’s shares, he remains bullish, citing “the value of the core e-commerce business and the significant hidden value of non-core assets.”
Hudson estimates that the company can grow core e-commerce revenue at a 30 percent annualized rate through 2020, “as the Chinese population adopts mobile broadband and e-commerce leapfrogs traditional bricks and mortar retail.” In addition, he expects cash flow margins to surge from the low 50 percent range to 60 percent “over time.”
He figures the company will generate $10 per share in free cash flow by 2020. He then figures if you assign a 20 times multiple of that figure, the stock would be worth about $200 per share. He also asserts there is “significant hidden value” in many of Alibaba’s smaller, growing operating businesses, including Ant Financial Services Group.
Hudson values these businesses at $50 per share. He also says “there will be future investment opportunities as these companies scale and explore spin-offs or initial public offerings.”
You can’t blame Hudson for being bullish on Alibaba. His hedge funds — Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund — rose 1.9 percent in the third quarter, driven in part by their investment in Alibaba. However, for the first three quarters the funds were off by 0.4 percent.
By contrast, the firm’s private equity funds performed spectacularly. In the third quarter alone, the three classes of Glade Brook Private Investors were up between 24.3 percent and 28.8 percent. For the first three quarters they were up between 35.9 percent and 48.5 percent.
Hudson cites the success of Alibaba’s IPO as well as gains from its investment in Spanish language media company Univision Communications for the gains.
