Goldman Sachs says hedge funds are increasingly trying to compete with VCs in private deals

Hedge fund participation in private deals that typically involve venture capital and private equity firms has grown “enormously” in recent years as fund managers look to try to boost their returns, according to a report from the Goldman Sachs sales and trading desk.

Hedge funds, which have traditionally invested in publicly-traded stocks, have become increasingly interested in private funding rounds being raised by fast-growing technology companies over the last few years, Goldman said.

The report — titled “Hedge Funds and the Convergence of Private and Public Equity Investments” — shows that hedge funds have participated in a record-breaking 770 private deals with an aggregate value of $153 billion since the start of the year.

By comparison, hedge funds participated in 753 deals with an aggregate value of $96 billion in 2020.

Meanwhile, in the decade before 2010, hedge fund managers participated in just over 50 deals per year on average, with a peak of 117 deals in 2007.

The number of deals done by hedge funds remains small relative to the activity of other investors in private markets. Indeed, hedge funds have been involved in just 4% of the deals done so far this year, according to Goldman.

That said, the footprint of hedge funds has grown large. They’ve invested 27% of the capital deployed in private companies so far this year, which reflects how they tend to invest in larger deals.

Three quarters of the capital came from just 10 hedge funds, Goldman said.

Indeed, Tiger Global Management and Coatue Management are just two hedge funds that are aggressively competing with Silicon Valley venture capitalists and other investors on private deals.

Tiger Global has invested in over 20 European start-ups in 2021, up from four in 2020, data from VC analysis firm Dealroom shows.

Billions of dollars have already been pumped into start-ups like London fintech Revolut and U.S. enterprise software firm Databricks by hedge funds this year.

Job van der Voort, CEO and co-founder of HR start-up Remote, told CNBC in July that there’s a “lot of new players in the market” and that it’s relatively easy for some companies to raise vast sums.

“We could have named almost any number and we would be able to raise the amount of money,” said van der Voort, whose company raised $150 million at a $1 billion valuation in the summer.

“Previously, funding start-ups, especially early stage start-ups, was something that was exclusive to venture capitalists and what you’re now starting to see is these next firms like Tiger and SoftBank that are happy to take smaller returns on longer time periods, and so they become very competitive,” van der Voort said.

“They can basically say, we’re going to fund a lot of different start-ups at really high valuation and push out any traditional venture capitalists.”

Most hedge fund investments involve U.S. companies but Goldman said it has observed an increase in the proportion of investments in APAC-headquartered companies, particularly in China, while the proportion of deals in EMEA has remained relatively unchanged.

The vast majority, 72%, of private hedge fund deals, are in the venture capital space, Goldman said, adding that 44% can be classed as later stage and growth equity deals.

Of the 1,500 companies currently owned by hedge funds in Goldman’s sample, 79% have only one hedge fund manager as a current investor, while 3% have over four hedge fund managers invested.