Booming equity markets and high-flying Chinese tech stocks — many of which cratered this year — were major contributors to that breakneck growth. But it was also fueled by a tool that venture firms tend to avoid: debt.
In particular, Tiger relied on a form of borrowing called net-asset-value financing, in which its existing stakes in closely held tech companies serve as the main collateral. With total outstanding NAV loans rising to about $4 billion last year, the firm’s long-time lender, JPMorgan Chase & Co., brought in more banks to help shoulder the increased demand, according to people with knowledge of the financing.
Historically, VC fund managers have eschewed debt, which may be hard to get at any price when your main assets are cash-burning startups that can be hard to value and often destined to fail.
But Tiger, founded more than two decades ago, helped pioneer the movement by fund managers that are now invading Silicon Valley and other tech bastions in search of unicorns — and they’re bringing with them new ways of doing business, such as taking on leverage that can boost returns or magnify losses.
“Where you have new investors crossing into an area like venture capital, they bring other practices along,” said Josh Lerner, a Harvard Business School professor who specializes in private markets. “There is a lot to be determined on how it’s going to shake out.”
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Representatives for Tiger Global and JPMorgan declined to comment.
Tech swoon
Coleman, 46, and venture-capital chief Scott Shleifer were among the first in the sector to see that investing in closely held tech companies, particularly those in China, could provide higher returns than wagers on publicly traded stocks.
CB Insights ranked Tiger Global as the most active venture investor last year, when it raised about $18 billion for its two most recent funds. It made investments in 333 companies, including 111 in the fourth quarter. Shleifer’s venture funds gained 54% last year and have generated average annual returns of 27% since inception.
Still, many Tiger investments that went public during the past two years have plunged. They include the American depositary receipts of Chinese tech firms Agora Inc. and ATRenew Inc., which have lost more than three-quarters of their value since the middle of last year.
Its stakes in US growth companies such as Roblox Corp. and Oscar Health Inc. have also languished since the Federal Reserve signaled in November that it would raise interest rates more quickly than anticipated.
Tiger isn’t the only big investment firm to deploy asset-based financing, and perhaps none uses it more than Masayoshi Son’s SoftBank Group Corp. In December, Softbank’s second Vision Fund borrowed $4 billion by pledging its $40 billion portfolio of stakes in private companies to a lending group led by Apollo Global Management Inc.
Asset-based lending, including margin loans, comprised more than 40% of Softbank’s $128 billion of debt as of December, according to a Bloomberg Intelligence analysis.
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Private equity funds have also started using NAV loans to make additional investments after exhausting their investor capital and to bolster the balance sheets of troubled portfolio companies, said David Philipp, a partner at Crestline Investors.
Some firms even use the borrowings to pay dividends to limited partners, who often want their money returned before committing capital to a subsequent fund run by the same manager.
“Where our structures work is for assets that are less liquid and don’t fit into the prime brokerage leverage models,” said Philipp, whose Fort Worth, Texas-based firm raised $1 billion in January to provide NAV loans and other forms of financing to money managers.
Tiger’s debt is composed of term loans that can be increased in size, one of the people familiar with the financing said. They’re backed by each fund’s portfolio, which can hold more than 100 stakes in private and public companies.
Only a few Wall Street banks, including JPMorgan and Morgan Stanley, have been willing to value and lend against such large portfolios of illiquid positions.
“U.S. banks do look at this as fairly high-risk,” said Zachary Barnett, cofounder of Fund Finance Partners. “Your traditional money-center banks do not like playing in the NAV space.”
But that may be changing.
PIP funds
The financing is conservatively underwritten, with loan amounts typically equaling 10% to 20% of the value of the underlying collateral, one person said. Moreover, the debt carries interest rates that are 3 to 6 percentage points higher than comparable government bonds.
Tiger’s Private Investment Partners funds may invest as much as 150% of their capital, with some of the excess financed through borrowings, according to one of the people. That means the latest fund, which is expected to close this month with $12 billion of commitments, could technically borrow as much $6 billion, although the person said that would be unlikely.
The borrowings permit the PIP funds to participate in subsequent fundraising rounds by private companies in which they have already invested, the person familiar with the situation said. Tech startups that have yet to generate much cash flow typically finance their businesses by periodically issuing stock, potentially diluting the stakes of existing investors unless they sign up to buy shares in subsequent offerings.
In September, Dan Loeb’s Third Point Investors Ltd. announced that it had entered into a $150 million credit line secured by its offshore fund in order to “employ gearing” — or add leverage — and documents show the loan came from JPMorgan’s structured equity financing unit.
Until last year, that unit provided almost all of the NAV financing for Tiger’s PIP funds, regulatory filings show.
As the loans grew larger, however, Tiger sought to bring in other banks that were already providing it with prime brokerage services, the people said.
In June, JPMorgan filed documents showing it would recruit other lenders to help finance NAV loans to Tiger dating as far back as 2017. And when Tiger’s two most recent PIP funds launched last year, JPMorgan assembled a group of lenders to provide the financing rather than doing it alone.
