Wonderfully sinister "Under the Counter" presents a missive about hedge funds and ponders if they should really be in the venture capital space. Is the move a sage effort to diversify or a bit of dangerous overreaching? Says "UTC":
The Journal claims that hedge funds are often willing to pay more for stakes in new companies than the venture capitalists themselves, prompting one to wonder if the traders have any idea what they're doing.
There are some interesting properties developing with hedge funds. Because they aren't exactly specialized, hedge funds that "hang on" to other lead investors are effectively deployers of capital, not investors of capital. They are in the business of putting as much money "to work" as possible. I see their diversification as a function of the lack of opportunities in their traditional investment space rather than a careful bit of asset class diversification.
What alarms me about this development is that I find it hard to imagine that they possess the monitoring abilities required to manage their investments properly. The five guys and gals at the leveraged desk for one fund Sub Rosa occasionally taps for debt are certainly not in any position to manage a firm if they have to foreclose. Nor do I think they are really in a position to effectively fight a long bankruptcy fight or, as should be the case, deploy resources to avert bankruptcy before it strikes.
Says the Journal in another article (subscription required):
Hedge funds often make quicker investment decisions than venture capitalists and can offer more money -- though some say they may not scrutinize private companies enough before investing.
Hedge funds now are mainly trying to deploy the enormous amounts of capital they have raised over the last several years and diversify their investments, since returns haven't been stellar for most public stocks. Hedge funds currently have an estimated $1.5 trillion under management world-wide, compared with about $261 billion for venture-capital firms in the U.S., according to data from HedgeFund Intelligence Ltd. and the U.S. National Venture Capital Association.
...hedge funds often have a more relaxed management style. A venture capitalist "might be camping out in your conference room, asking all kinds of annoying questions," says Bill Burnham, a former managing director with Mobius Venture Capital who is now a private investor. The attitude of a hedge-fund manager, he says, might be, "Here's your check -- email me when you go public."
I am reminded of the view that fostered the growth of massive, inefficient conglomerates. Massive amounts of capital and acquisition power suggest diversification. The problem is that financial services giant QRX Megacorp, Inc. probably shouldn't be making salsa.
I can't imagine that this will end well for the less prudent of hedge funds. The question is, how many prudent hedge funds are there?