The booming venture capital business has been slowing down for the past two quarters, at least judging by the activity of some hedge fund firms.
Sure, 2015 was the second-biggest year of the past 20 in terms of capital deployed to deals, according to the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association tracking venture capital activity in the U.S.
In the fourth quarter venture capitalists plowed $11.3 billion into 962 deals. However, that was down 32 percent in terms of dollars invested and down 16 percent in the number of deals compared with the third quarter of 2015.
And there is no indication this pattern reversed in the first quarter of this year.
The abrupt slowdown in venture capital investments is reflected in the activity of hedge funds that make private investments.
Take Valiant Capital Management, the San Francisco hedge fund firm headed by Christopher Hansen. Private investments — which it calls side pockets — account for more than 25 percent of its assets, which stood at nearly $2.2 billion at the end of January. Yet according to a report sent to clients of Valiant Capital Partners, the firm’s onshore hedge fund, just two investments were made in the fourth quarter, and both were add-on investments to earlier deals. Valiant also made only two initial investments in the third quarter. By comparison, from January to May 2015, Valiant made six investments and nine in all of 2014.
Valiant also appears to have made just one private investment in 2016. In February it participated in the $26 million Series D funding of BrainBees Solutions, parent company of the children-focused e-commerce website FirstCry.com. This is Valiant’s second investment in BrainBees.
Another hedge fund that has incorporated private investments into its strategy is New York–based Falcon Edge Capital, founded in 2012 by Richard Gerson, who was previously a founding executive at Tiger Cub John Griffin’s New York–based Blue Ridge Capital. As of the end of February, Falcon Edge had about $157 million invested in its side pockets, which accounted for 6 percent of its hedge fund, Falcon Edge Global.
Falcon Edge made six new side pocket investments in 2014 and another five in 2015. However, it has not made a new investment since August, according to its February 2016 monthly report to clients.
The slowdown in new private investments by hedge funds is most apparent at Tiger Global Management, the New York investment firm founded by Chase Coleman. Unlike the other firms, however, it mostly keeps its private investments in separate vehicles.
Tiger Global has $10 billion in long-short hedge funds and long-only funds. At year-end, private equity — which is what the firm calls the private investments — accounted for less than 11 percent of assets in the hedge funds, collectively called Tiger Global Investments. The firm has another $10 billion or so in ten venture capital funds, which are separate from the firm’s long-short and long-only funds.
Given the size of its private investment business, it is not surprising that Tiger Global is regularly an active investor in new deals or add-ons to previous investments. For example, in the first three quarters of 2015, the firm made between 15 and 20 investments in each of the three-month periods, according to website CrunchBase.com, which does a very good job of chronicling private deals.
This was a typical range of volume in prior years as well.
However, in the fourth quarter Tiger Global made nine investments. Then, in the recently completed first quarter, it made just four investments. None of the four took place in March, according to CrunchBase.com.
Of course, the website could have missed a few deals. But it is a very good apples-to-apples comparison if you want to discern a pattern of activity.
Tiger Global’s slowdown comes at the same time it raised $2.5 billion for its new venture capital fund, Tiger Global Private Investment Partners X, which closed in November.
However, investors are probably not too upset that little of this capital has been deployed at this point. They expect Tiger Global to make smart decisions on when and what to invest in, not to just plunk down the cash as fast as possible.
