The firm borrowed money to buy stakes in private companies and posted massive gains. But as valuations fade, such bullishness is veering into losses across the industry.
ByHema Parmar and Miles Weiss June 8, 2022, 12:01 AM EDTUpdated onJune 8, 2022, 11:30 AM EDT
Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan Chase & Co. to go even further.
With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio.
Now, the industry is bracing for a reckoning.
Across Wall Street, billionaire investors and their advisers are urgently trying to figure out how much exposure they have to plunging values in Silicon Valley unicorns and other private ventures. They’re reviewing disclosures by some of the most active buyers of those assets, including D1, Tiger Global Management, Coatue Management, Lone Pine Capital and Viking Global Investors.
Clients had been giving their money managers more leeway to buy assets that can be hard to value and slow to sell. Some firms used leverage to boost returns.
Yet valuations of many closely held companies are tumbling even harder than the technology stocks that slumped on public markets this year. That has left hedge fund investors trying to figure out whether their money managers might suspend withdrawals, face demands from lenders to post more collateral, or — in a worst-case scenario — have to start selling investments quickly enough to drive down asset prices in a chain reaction.
“Years of cheap and easy money have driven up valuations,” said Taylor Rosanova, head of the fair value group at Marcum, which helps investors mark privates. “This year company multiples will fall, investor marks will fall, values in totality will fall.”