jpmorgan: As Tiger Global’s VC arm borrows billions, JPMorgan taps more banks

Chase Coleman’s Tiger Global Management made more than 300 venture capital investments last year, including more than one a day in the fourth quarter as assets in its VC arm tripled to around $65 billion.

Booming stock markets and high-flying Chinese tech stocks – many of which have cratered this year – have been major contributors to this skyrocketing growth. But it was also fueled by a tool that venture capitalists tend to avoid: leverage.

In particular, Tiger has relied on a form of debt called net asset value financing, in which its existing stakes in closely held technology companies serve as primary collateral. With total outstanding NAV loans standing at around $4 billion last year, the company’s longtime lender, JPMorgan Chase & Co., has tapped more banks to help meet demand. increased, according to people familiar with the funding.

Historically, venture capital fund managers have avoided debt, which can be difficult to obtain at all costs when your main assets are energy-intensive startups that can be difficult to value and often doomed to failure.

But Tiger, founded more than two decades ago, helped start the movement of fund managers now swarming Silicon Valley and other tech strongholds in search of unicorns — and they’re bringing new ways of doing things with them. business, such as supporting leverage that can increase returns or magnify losses.

“When new investors enter a field like venture capital, they bring other practices,” said Josh Lerner, a professor at Harvard Business School who specializes in private markets. “There’s a lot to be determined about how this is going to play out.”

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Representatives for Tiger Global and JPMorgan declined to comment.

Technical fading

Coleman, 46, and venture capital chief Scott Shleifer were among the first in the industry to see that investing in private tech companies, especially those in China, could offer higher returns than betting on shares listed on the stock exchange.

CB Insights ranked Tiger Global as the most active venture capitalist 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 capital funds gained 54% last year and have generated average annual returns of 27% since inception.

Yet many of Tiger’s investments that have gone public over the past two years have plunged. They include U.S. certificates of deposit from Chinese tech firms Agora Inc. and ATRenew Inc., which have lost more than three-quarters of their value since the middle of last year.

His stakes in U.S. 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 faster than expected.

Tiger isn’t the only major investment firm to deploy asset-based financing, and perhaps none use it more than SoftBank Group Corp. by Masayoshi Son. In December, Softbank’s second Vision Fund borrowed $4 billion by pledging its $40 billion portfolio of private company stakes. to a lending group run by Apollo Global Management Inc.

Asset-based lending, including margin lending, accounted for more than 40% of Softbank’s $128 billion in debt as of December, according to analysis by Bloomberg Intelligence.

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Private equity funds have also started using NAV loans to make additional investments after they have exhausted their investor capital and to bolster the balance sheets of struggling portfolio companies, said David Philipp, partner at Crestline Investors.

Some companies even use borrowings to pay dividends to limited partners, who often want their money back before committing capital to a subsequent fund managed by the same manager.

“Where our structures work is for assets that are less liquid and don’t fit prime brokerage leverage models,” said Philipp, whose Fort Worth, Texas-based firm raised $1 billion. of dollars in January to provide NAV loans and other forms of financing. to fund managers.

Tiger’s debt is made up of term loans that can be increased in size, said one of the people familiar with the financing. They are backed by each fund’s portfolio, which can hold more than 100 equity interests in private and public companies.

Only a few Wall Street banks, including JPMorgan and Morgan Stanley, have agreed to price and lend against such large portfolios of illiquid positions.

“U.S. banks see this as a pretty high risk,” said Zachary Barnett, co-founder of Fund Finance Partners. “Your traditional currency center banks don’t like to play in NAV space.”

But that can change.

PIP funds

Financing is underwritten conservatively, with loan amounts typically equating to 10% to 20% of the value of the underlying collateral, one person said. Moreover, the debt carries interest rates 3 to 6 percentage points higher than comparable government bonds.

Tiger’s Private Investment Partners funds can invest up to 150% of their capital, with some of the excess being financed through debt, according to one of the people. This means the latest fund, which is expected to close this month with $12 billion in commitments, could technically borrow up to $6 billion, although the person said that would be unlikely.

The borrowings allow PIP funds to participate in subsequent fundraisings by private companies in which they have already invested, the person familiar with the matter said. Tech startups that haven’t yet generated a lot of cash flow typically fund their businesses by periodically issuing stock, which could dilute existing investors’ stakes unless they sign up to buy stock during a startup. subsequent offers.

In September, Third Point Investors Ltd. of Dan Loeb announced that he took out a $150 million line of credit backed by his offshore fund to “employ gear” – or add leverage – and documents show the loan came from of JPMorgan’s structured equity. funding cell.

Until last year, this unit provided nearly all of the NAV funding for Tiger’s PIP funds, according to regulatory filings.

However, as lending increased, Tiger sought to tap into other banks that already provided it with top-notch brokerage services, the people said.

In June, JPMorgan filed documents showing it would recruit other lenders to help fund NAV loans to Tiger dating back to 2017. And when Tiger’s last two PIP funds launched last year, JPMorgan brought together a group of lenders to provide the financing rather than doing it alone.

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