When it was reported in November that Fidelity Investments marked down the value of its investment in social media company Snapchat’s convertible preferred stock in the third quarter, market observers started to question the valuations of high-flying pre-IPO companies across the board. After all, the reduction in Snapchat’s value came after Fidelity and BlackRock reportedly reduced the value of their investments in Dropbox, the web hosting service.
One of the big questions was whether hedge funds would start aggressively reducing the value of their private holdings in the fourth quarter, especially those so-called unicorns — private companies whose valuations exceed $1 billion. An examination of the fourth-quarter results of at least three high-profile hedge funds with sizable stakes in private companies shows no apparent adjustment in these valuations on a portfolio-wide basis. All three funds reported roughly break-even results in their private portfolios as a whole in the fourth quarter.
Even so, certain specific investments could have had their valuations lowered, while others had them raised. Take Chase Coleman’s Tiger Global Management. At the end of December, between 9 and 10 percent of the New York firm’s hedge funds’ assets were invested in private equity. In the fourth quarter, this portfolio posted a slight 0.2 percent gain, while for the full year it was down just 0.1 percent. The hedge funds — which had a total of $7.3 billion under management — gained 14.5 percent for the quarter and 8.6 percent for the year.
It is not publicly known which specific investments are included in the private portfolio of Tiger Global’s hedge funds. According to investors, they can change from quarter to quarter or year to year. In the past, Tiger Global’s private investments have included Facebook, LinkedIn, Yandex and JD.com. A person familiar with the portfolio says the majority of its positions were sold over the course of 2015, while one was marked down significantly.
Tiger Global’s hedge funds are audited twice each year, including the private portfolios. The firm’s internal team dedicated to private valuations meets monthly and bases valuations, in part, on comparables, discounted cash flow analysis, precedent transactions and option price models.
New York–based Falcon Edge Capital has $158 million invested in its side pockets, which is what it calls its private investment portfolio. This accounted for nearly 6 percent of its portfolio at year-end. The firm was founded in 2012 by Richard Gerson, who was previously a founding executive at Tiger Cub John Griffin’s New York–based Blue Ridge Capital. Falcon Edge’s flagship fund returned 1.9 percent in the fourth quarter but still posted a loss of 10 percent for the year.
However, investors who chose to invest in its side pockets fared better, since this portfolio gained 18.5 percent for the year. This was mostly due to the 20.6 percent gross gain in the side pockets in the second quarter.
As of year-end, Falcon Edge had made 12 individual private investments. It had exited one of them in June — a Chinese communications company in which it made more than five times its investment. The firm invested $98 million in the remaining 11 companies, and they were valued at year-end at $158.4 million, roughly the same as at the end of the third quarter. Six of the 11 are Indian companies, mostly in the communications industry.
Of those 11, only three appear to have significantly appreciated in value since Falcon Edge’s initial investment in them. Keep in mind that five of the investments were made in 2015, the last in August, so it may be too early to assess their success.
Yet if you drill down to the individual holdings, the success has been mixed. For example, an investment made in August 2014 in a Brazilian communications company declined in value from $5.9 million at the end of the third quarter to $4.9 million at year-end. An Indian communications company in which Falcon Edge had invested $13.1 million in October 2014 is now valued at $12.4 million, down from $17 million at the end of the third quarter. On the other hand, another Indian communications company in which Falcon Edge invested $15.1 million in January 2015 is now valued at $20.5 million, up from $14.3 million at the end of the third quarter.
Then there is Christopher Hansen’s San Francisco–based Valiant Capital Management. At year-end its $568 million side pocket portfolio accounted for 24 percent of the firm’s total assets of nearly $2.4 billion.
Valiant reported that the side pocket portfolio was exactly flat for the year after posting a mere 0.4 percent net loss for the fourth quarter. Altogether the hedge fund was up 3.76 percent for the year. It has 36 open side pocket investments, including Dropbox, Uber Technologies and Pinterest.
It is a little difficult to assess how Valiant’s individual holdings have fared since its initial cost basis seems to change from quarter to quarter. For example, in its third-quarter report, the firm says Valiant Capital Partners, its onshore hedge fund, had made a nearly $15.5 million investment in Dropbox in September 2011 that was worth $37.6 million at the end of September 2015. However, the year-end report said the same fund made a $9.5 million investment in Dropbox in September 2011 that was worth about $18.8 million at the end of December.
The third-quarter report said Valiant made a $23.6 million investment in Uber in December 2014 that was worth nearly $28 million by the end of September. The year-end report, however, says it made a $17.9 million investment in Uber in December 2014 that was worth $26 million at the end of December 2015.
In any case, none of these reports suggests a widespread markdown of valuations among private companies. We’ll see what, if anything, changes over the course of the rest of the year, especially if the public equity markets continue to decline or remain very volatile and the IPO market does not recover.
