Hedge funds already participated in 770 deals worth $153 billion in the first half of this year. Last year was the largest year for hedge fund involvement in the private markets, with funds participating in 753 deals worth $96 billion. Hedge fund involvement in the private market dropped off after the Global Financial Crisis, possibly due to liquidity challenges, changing opportunity sets and the need to focus on their core business.īetween 20, hedge funds averaged 200 private deals a year, and the trend has continued to shift higher since then. In the 10 years before 2010, hedge fund managers averaged 50 private deals per year, peaking in 2007 with 117 deals. Goldman Sachs also put some hard numbers down to the trend of hedge funds boosting their investments in the private markets. "Some of them will do it through separate accounts or smaller, less liquid 'best ideas' funds, but most of them do it through a side pocket vehicle, which often allows them to invest up to 10% of their total AUM opportunistically." Hedge funds are increasingly investing in the private markets HF managers feel that pressure and so increasingly they are creating ways to earmark their capital for private investments," Lynsey Lebowitz Hughes of Duke University said via email when asked to weigh in on the Goldman study. "As this data points out, privates have performed better over the long term. The hedge fund managers and allocators that Goldman spoke to cited the improved performance as one of the reasons hedge funds have entered the private markets.
Private equity and venture capital have outperformed hedge funds by about two to one, as hedge funds returned 7.1% annualized over the last decade. For the 10 years ending in 2020, PE and VC strategies have enjoyed an annualized return of 14.2%, marking a 3.7% premium over equities. Investors are increasingly choosing private-market options over hedge funds because they are seeking higher returns, and for the most part, the private markets have delivered. Private markets enjoyed better performance Within the PE and VC group, venture capital and growth equity strategies have been growing at a 15% annualized rate. The one exception in this second group was private debt, which enjoyed the same 12% annualized rate as PE and VC. On the other hand, hedge funds and other illiquid assets under management slowed to an annualized rate of 5% to 6%. However, starting in 2016, private equity and venture capital strategies saw their assets under management grow from $3 trillion to $4.6 trillion for a 12% annualized rate. Meanwhile, hedge funds and other illiquid assets under management grew at a rate of around 10% annualized. Investors in alternative assets are pouring more money into private equity and venture capital and dialing back their allocations to hedge funds.īetween 20, assets under management in private equity and venture capital strategies, including growth equity strategies, increased $2.7 trillion or 5% annualized. There's another reason hedge funds are diving into the private markets more and more often. However, this phenomenon hasn't continued this year, as that Liquid IPO basket was down 7.3% for the first half of the year. Hedge funds have benefited in this respect by participating in late-stage private funding rounds. In addition to the higher liquidity and valuation support for the private capital markets, a strong "'IPO pop' phenomenon." The firm states that its Liquid IPO basket was up 147.9% last year, indicating that access to IPOs has become even more important for performance. Additionally, 327 SPACs have raised $104 billion year to date. The previous year-to-date record was $43 billion across 210 IPOs in 2000. Traditional IPOs are also off to the fastest start to a year ever, with $58 billion in issuance across 157 IPOs. Year to date, issuances have reached $337 billion, marking the largest first half ever recorded. equity and equity-linked issuances like traditional IPOs, special purpose acquisition companies (SPACs), follow-ons and converts reached a record high of $468 billion last year. Goldman says capital market conditions have been extremely supportive. There is another factor driving increased capital flows in the private market. In the first half of this year alone, 155 companies achieved unicorn status for the first time. The firm said that in 2006, there were only three unicorns, but today, there are 392 active unicorns. Additionally, Goldman finds that the volume of highly-valued unicorns, private companies valued at more than $1 billion, has risen dramatically.
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