Hedge funds involvement in VC falls to two-year low

Steven Loeb · March 21, 2016 · Short URL: https://vator.tv/n/4422

Hedge funds have only put money into 21 deals this quarter, the lowest since Q1 2014

The coverage of the venture capital market this year has been dismal. Nobody seems to feel good about where things are or where they are going.

Now we have yet another sign that venture capital is going to have a bad 2016.

The amount of VC rounds with hedge fund participation has fallen to their lowest levels in years, according to data out from Pitchbook.

In the first quarter of 2016, hedge funds participated in venture deals worth just $617.8 million, the lowest amount since the fourth quarter of 2013. In fact, this is the first quarter since the end of 2013 that has seen them involved with less than $1 billion in investment. 

They also only participated in 21 rounds, the lowest number since the first quarter of 2014. 

So why the slowdown?  According to Pitchbook, it's because of the risk that hedge funds take when they invest.

"Unlike the long lockups of traditional venture funds, hedge fund mandates typically leave them vulnerable to investor redemptions, limiting their ability to allocate capital to illiquid private investments," the company wrote.

"Daily mark to market accounting may also require funds to mark down private valuations when public comps decline on the day. In an uncertain environment, hedge funds must prioritize core short term allocations and liquidity over extended due diligence into opaque private companies."

Basically, investing right now is not worth the risk for them.

When it comes to which hedge funds are most active, it's not even close. Tiger Global Management has made 119 investments, including Thumbtack, Flipkart, InVision, Airbnb, and Credit Karma. The firm is so proilific, in fact, that Pitchbook doesn't even include them in the data since "the capital invested from the $20 billion asset manager’s several multi-billion dollar venture funds skew the data."

Second on the list is D.E. Shaw, which has made 43 investments, followed by Maverick Capital with 39, Two Sigma Investments with and Ironridge Global Partners with 26.

The 2016 outlook 

At the end of 2015 late stage investors started downgrading their unicorns, the IPO market shrank to nothing and investments fell to their lowest numbers in years.

All of that has left entrepreneurs bracing for a tough 2016.

In a survey from Silicon Valley Bank earlier this month, over a third, 36 percent, said that their outlook on business conditions for their company are the same or worse than last year. In 2015, 26 percent had said the same thing, and only 18 percent in 2014, meaning the number has doubled since then.

A total of 21 percent said that access to financing was their single biggest challenge in running their businesses.

(Image source: forbes.com)

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