Why Hedge Funds Are Increasingly Turning To The Private Markets For

Traditionally, hedge funds stuck to the public market when it came to their allocations, but a new study from Goldman
Sachs suggests that is changing. The firm reviewed more than 100 hedge fund managers with exposure to the private markets during the second quarter.

Hedge funds dive into the private markets

Goldman Sachs notes that in the past, the capital formation process for companies has been pretty clear, with each stage having its own set of funders. Meanwhile, hedge funds focused on the public markets.

In their early stages, companies received funding from venture capital firms or angel investors. As they grew, companies received funding from later-stage VC or growth equity firms. Some companies raised a crossover round as a final step before holding an initial public offering.

Hedge funds played no role in the early funding of companies because they focused on the public markets. However, that is changing as more and more hedge funds widen their investment scope and move into the private markets.

How the market is changing

Conventional wisdom suggests that companies are staying private longer than they have in the past, but the firm found something interesting. Goldman’s research indicated that the average time between founding and an IPO was nine years in 2006, but it has only increased to 10 years in 2021.

However, it did find some other changes. According to Goldman, growing companies are conducting more equity funding rounds before their IPO. In 2006, the median number of funding rounds was one, and in 2021, this number has grown to three. Companies are raising more money in the private markets as well, with the average climbing from $43 million in 2006 to $222 million in 2021. The median has increased from $30 million to $58 million.

Additionally, Goldman finds that the volume of highly-valued unicorns, private companies valued at more than $1 billion, has risen dramatically. The firm said that in 2006, there were only three unicorns, but today, there are 392 active unicorns. In the first half of this year alone, 155 companies achieved unicorn status for the first time.

More support for the private markets

There is another factor driving increased capital flows in the private market. Goldman says capital market conditions have been extremely supportive. U.S. 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. Year to date, issuances have reached $337 billion, marking the largest first half ever recorded.

Traditional IPOs are also off to the fastest start to a year ever, with $58 billion in issuance across 157 IPOs. The previous year-to-date…