Why are hedge funds betting more on private companies?

Hedge funds have been investing their capital in private companies for some years as they didn’t want to miss out on the profit opportunities with companies remaining private for longer. But now they are further boosting their presence in the private markets. Let’s explore some of the reasons for the recent trends.

Profit proliferation

Private companies have been going public at a rapid pace in the recent years offering the potential for investors to get in while companies are still private and exit as the companies soar after going public. 

According to a Wall Street Journal story, so far this year the dollar value of registered stock offerings, whether through initial public offerings, special-purpose acquisition companies and follow-on deals, has already surpassed the annual average of $290 billion that came to market in the U.S. over the period from 2011-2020. 

Improved liquidity in the secondary markets

Fund managers still worry about the liquidity of their investments, after their experience in the 2007-08 financial crisis when it became hard for the clients to get their money back.

However, the managers contend that the liquidity in the secondary markets has improved over the years and so when the private companies do go public, it’s easier to navigate the markets.

Craig Bergstrom, Managing Partner and Chief Investment Officer at the $8 billion hedge-fund investor Corbin Capital Partners LP, said the following on the theme of hedge funds investing in private companies: 

“It’s not inherently a good idea—it’s not, ‘How do I buy as much of this as possible?’ But there are some players we’ve seen execute on it very successfully.”

Opportunity to charge higher fees

For some managers, the opportunity to invest in private companies is allowing them to charge higher fees to their clients. For example, Anthony Scaramucci’s SkyBridge Capital offered potential clients stock in Swedish payments company Klarna Holding AB for a 7.5% placement fee and 20% performance fee whereas the maximum fees SkyBridge charges on its fund-of-funds products are 1.5% for management fees and 10% for performance.