If Snapchat parent Snap goes ahead as reported with an initial public offering next year, a number of hedge fund managers could be handsomely rewarded. That’s because they have been investors in the private stock of the photo-messaging application provider, in some cases for several years.
For example, in early 2015, Paul Hudson’s Glade Brook Capital Partners raised money for its Glade Brook Private Opportunities Fund and Glade Brook Private Investors IV vehicles. Private Opportunities was designed to invest in what the firm called four to six “big global ideas” over the ensuing 24 months. The fund’s initial investments were Snapchat and Uber Technologies, the ride-hailing service.
Private Investors IV was created to invest in Snapchat alone. Earlier this year Glade Brook launched Glade Brook Private Investors VIII, designed to allocate to Snapchat’s $1.8 billion Series F round of financing.
Glade Brook is one of several Tiger Cubs, firms with ties to Julian Robertson Jr.’s Tiger Management Corp., and other high-profile hedge fund managers that participated in Snapchat’s financing earlier this year. Among them: Stephen Mandel Jr.’s Lone Pine Capital, Philippe Laffont’s Coatue Management, and James (Jamie) Dinan’s York Capital Management. This is at least Coatue’s second allocation to Snapchat; in 2013 it invested $50 million in the company.
Mandel’s involvement is especially intriguing because Lone Pine rarely invests in private businesses. In fact, its only other publicly known private investment was in Uber.
These days, Glade Brook devotes most of the assets in its hedge funds to private companies. As of October 1, $935 million of the $1.2 billion managed by the Glade Brook Global Domestic Fund and the Glade Brook Global Offshore Fund were in private equity vehicles, according to the firm’s third-quarter letter to clients, which was obtained by Alpha.
None of these hedge fund investors is expected to sell any shares in the planned Snapchat IPO, which was initially reported by Reuters. If the stock surges — say, doubles — after it goes public, some of them might start to lighten their positions. However, Glade Brook’s Hudson may buy more shares, according to an individual knowledgeable about the offering.
Snapchat was founded by former Stanford University students Bobby Murphy and Evan Spiegel, who rejected a $3 billion takeover offer from Facebook in 2013. Some investors believe younger consumers are moving away from Facebook and toward social media outfits like Snapchat and Instagram, which have become better at monetizing their platforms than in the past.
Snapchat has been a controversial private investment. Late last year Fidelity Investments drew a lot of attention when the mutual fund giant marked down the value of its position in the company.
But according to sources, Glade Brook, which uses a third-party firm to value its private investments each quarter, hasn’t marked down the investment. Several investors in private companies don’t assign values to their holdings until they realize gains.
So far, Snap has filed its IPO plans with the Securities and Exchange Commission under the U.S. JOBS (Jumpstart Our Business Startups) Act, which permits companies with less than $1 billion in revenue to go that route. So we don’t know anything about Snap’s financials or how many shares the company intends to offer, their price range, and, therefore, their anticipated valuation.
The investment bankers involved will probably price the IPO conservatively at first, preferring to up the price and the number of shares if demand for the deal proves especially strong. One person with knowledge of the flotation expects the valuation starting point to range between $20 billion and $25 billion.
Unlike many other Internet companies, Snapchat caters more to — and is better known by — younger demographics. More-seasoned portfolio managers will likely need to be educated about what it does and how it makes money. However, as one individual stresses, any manager who specializes in Internet and other technology stocks must be familiar with some companies.
Snapchat began monetizing its business only in 2016, so investors anticipate a sharp increase in revenue over the next few years.
One investor points out that Snapchat is less visible outside the U.S. than two somewhat comparable social media players, Facebook and Twitter. However, those two companies get a small percentage of their users — but the bulk of their revenue — from the U.S. “The U.S. is the golden goose,” says a person involved in the planned IPO.
The big question is whether that description will apply to the investment when Snapchat’s stock goes public.
