Business

Hedge fund titans become venture titans through their family offices

Danny Manu, founder of wireless headphone developer CEH Technologies, is hoping to launch a fundraising in April, after years of graft.

His dreams can become real, courtesy of UK hedge fund pioneer Lord Stanley Fink who has invested in CEH, and become its chairman: “He has brought us credibility, contacts and financial expertise,” says Manu.

Fink, a former UK Conservative Party co-treasurer, used to be chief executive of Man Group, establishing it as a FTSE 100 hedge fund behemoth. He later turned to startups. His current family office deals include Project Etopia, a would-be backer of smart cities, and Hay Hill Wealth Management.

Hedge fund groups like Tiger Global, Maverick Ventures, Coatue, Dragoneer and D1 have made a big business bet on venture capital

Ringo Francis has joined the CEH board with Fink after building up Zenith Hygiene Group which succeeded in the hygiene sector, long before Covid-19 taught us to be more careful.

Manu has developed wireless earbuds which give owners the chance to talk to other individuals speaking a foreign language. Marketed through CEH subsidiary Mymanu, individuals can talk face to face, whether or not they are connected to the internet.  They can choose between 37 languages. Groups can sign up and Danny Manu wants to offer online voice translation across borders. Footballers are among potential user groups showing interest, he adds.

All this has taken time to develop because Manu has resisted signing third-party licensing deals. The pandemic has been a distraction. And the arrival of Fink and Francis suggests a quantum leap is possible, markets permitting.

CEH is far from the only venture to gain lustre by winning support from family offices led by smart hedge fund managers. The majority of hedge fund executives like UK-based Stuart Roden, David Harding and Crispin Odey only invest in VC on an occasional basis. But others have become serial investors.

Alan Howard, founder of Brevan Howard, is an enthusiastic backer of Web3 who has just participated in a fundraising round for Livepeer, a decentralised video transcoding network. Steven Cohen has also been an early mover into Web3 applications, including the metaverse.

Louis Bacon’s Moore Strategic Ventures has made 56 investments, according to Crunchbase. It is Family Capital Investment Office of the Year, backing a series of innovative ventures, such as nuclear power venture, Commonwealth Fusion. It has backed a series of Indian deals, most recently Mfine, an Indian venture which offers deep tech patient health inspections, remote from hospitals.

After earning renown as a hedge fund manager, David Shaw has invested in 49 companies at technology group DE Shaw & Co which recently backed Tasso, a medical diagnostics company. Shaw has lately switched his interest to computational biotechnology which informs many of his deals.

Danny Och quit his hedge fund to manage a family office called Willoughby Capital. It has made 15 investments and backed Robinhood, Coinbase and Instacart, plus a SPAC which merged with car dealer Cazoo in 2021. Willoughby has just invested in Paradox whose AI drives conversational software, helping companies like Unilever and McDonalds with their recruitment.

Jim Simons founded data-driven hedge fund Renaissance Technologies. His family office, Euclidean Capital, is a keen backer of AI.  It has made 26 investments, with the latest being DroneBase, a data platform that serves the drone industry.  His son Nat has set up his own family office, Prelude Ventures, which backs green deals. 

Hedge fund managers often have a heightened sense of danger and several of them are interested in backing ventures to deal with climate change. Bill Gates’ Breakthrough Energy, a backer of climate tech, is backed by hedge fund veterans like Julian Robertson, Chris Hohn, Ray Dalio – and new generation types like Nat Simons. 

Elsewhere, hedge fund groups like Tiger Global, Maverick Ventures, Coatue, Dragoneer and D1 have made a big business bet on venture capital. According to an EY survey, a quarter of hedge funds are prepared to allocate 20% to 30% of their portfolio into private assets – sometimes even more.

VC has contributed to some impressive returns, helping the sector to 9.4%, its highest performance since 2010 according to Eurekahedge. Around 39% of clients told EY their confidence in the hybrid model had grown against 17%, whose faith has fallen. Family offices still remember how hedge funds saddled them with illiquid VC deals, popped into a side pocket after the financial crisis of 2008 but memories can fade after a decade of good performance.

The surge in VC developed after 2008 when central banks tried to boost the global economy by cutting base rates close to zero and buying back government bonds to reduce their yield to a similar level.

Near-zero rates led to a rally for everything and wrecked many of the trading strategies used by a range of hedge funds. However, many traders realized zero rates would dramatically transform prospects for growth stocks, particularly those driven by technology breakthroughs. Hedge funds also realised they needed to invest in tech in the private markets because their founders were in a position to raise VC funding, without needing to list their stock. 

Fundraisers learned to love hedge funds because they make quick funding decisions and often pay more for positions than established VC  firms. The SEC recently raised concerns over poor financial disclosure at private companies. But this did not deter hedge funds confidence in using stock-picking skills to detect a competitive edge, particularly when momentum is going their way.

Several hedge funds which invest in VC are led by individuals who once worked work for Julian Robertson’s Tiger Management, a hedge fund renowned for its obsession analysis. Chase Coleman at Tiger Global is one of them. He has become a leading VC investor getting through a deal a day in 2021, to take assets close to $100 billion. 

According to Pitchbook: “Situations, where traditional VC firms are significantly outbid by hedge funds and other crossover investors, have become a frequent occurrence.”  It cites hedge funds offering a premium of 50% to 100% in less than 48 hours, without demanding seats on the board. 

Hedge fund investors have changed the VC business. They are also big supporters of SPACs, used by growth companies to get a listing, when they need one, quickly and easily. Which is precisely how hedgies like to do business.

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