Beware of powerful and ambitious Tigers amongst Big VCs

I shared a post the other day:

It inspired FinTech friend and colleague Efi Pylarinou to write a post about it. Efi has kindly allowed me to share the post with you here ...

Beware of powerful and ambitious Tigers amongst Big VCs

We are in the 6th month of the Water Tiger Year and Liquidity is Top of Mind for more than a dozen reasons.

Capital makes the world go round and VCs play a significant role in financial markets, especially, the top powerful VC boutiques.

Fintech has been a Star sector as the interest from VCs exploded in 2021. BestBrokers.com recently reported that the annual growth in the number of Fintech unicorn investments was 330% outpacing other major sectors like Software & Services which grew 274% and Cybersecurity with a 267% growth rate.

In 2021, there were 30–45 new Fintech unicorns born every quarter and as a result, the year ended with 157 new unicorns bringing the total to 235! A few of the top Fintech bright stars of 2021 were Trade Republic, Mambu, and FTX. The year also saw major major exits with IPOs like Coinbase, Nubank, and Grab.

Source

FintechLabs keeps openly track of the global fintech unicorns born since 1999 using private valuations from the latest reported rounds and of market capitalizations for those listed.

The top global VCs are now hitting the breaks in terms of the number of investments. US pitchbook data shared in a Fortune article, reports that Temasek Holdings did 14 less deals in Q2 2022 compared to Q2 2021 and Coatue management did 24 less (more details here). What struck me was that Tiger Global Mgt. did only 4 deals less compared to last year, making them look kind of oblivious to the current macroeconomic environment.

So I wonder along with Ian Foley, the cartoonist, what the Tiger is up to

Tiger Global mgt is 21 years old now. It started out as a hedge fund business and then created a long-only fund business (public shares) and only lately got into Venture Capital.

Its VC activities competed aggressively with the likes of SoftBank, Sequoia, or Andreesen Horowitz. As of October 2021, Tiger Global mgt. managed c. $95 billion and its venture capital business accounted for a staggering two-thirds of its total assets. The explosion of its VC business was very recent.

According to PitchBook and CB Insights data, Tiger’s two biggest and newest funds were launched in 2021. Tiger Global mgt invested in 333 companies in 2021 and raised $18 Billion! As a result, over 90% of Tiger Global mgt VC investment valuations (c. $64 B as of 2021) were unrealized gains or better said paper gains. This of course is not uncommon in VC land as it often takes years for any sort of exit to materialize.

When I look at the approximate percentage of deals that Tiger Global mgt has invested in Fintech, they are clearly number one in terms of the number of unicorn Fintech deals compared to other Top VCs. From the data below we can safely assume that 30% of the private companies held by Tiger Global mgt. are unicorn Fintechs and the wild card is how much will their valuations drop.

Their top private Fintech holdings included in the VC arm of Tiger Global Mgt are: [1]

• Revolut
• Checkout.com
• Mambu
• API provider TrueLayer
• US payments fintech ChargeBee
• French Fintechs Qonto & Spendesk
• Estonian ID verification Fintech Veriff
• Aussie commission free trading Stake
• Indian invest. App Jar

Now, there are two scary facts that are not so visible. One is that Tiger Global mgt. has taken out huge loans from JP Morgan that are collateralized by shares with several of these private unicorns that were not only overvalued but also illiquid.

Bloomberg reported in March this year, that:

`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.`

NAV loans (net-asset-value) are not covered that much in the media as markets were pumping and liquidity was flowing generously, and interest rates were negligible. Even private equity firms started using more NAV loans to pay back investors before raising the next fund.

It seems that JP Morgan [2] and Morgan Stanley are providers of such NAV loans which clearly have a musical chairs kind of risk. Often the collateral is a mix of publicly listed shares and private shares but in these markets even public shares have dropped substantially, which means that margin calls are on the rise.

With a 2021 $64 billion valuation for Tiger`s Global Mgt. VC investments the $4 Billion NAV loan looks very well over collateralized. But the portfolio markdowns are ahead of us.

So the second scary unknown, is whether Tiger Global will be forced to sell investments from its liquid hedge fund and long-only public shares holdings to cover the margin calls of its VC investments? Their hedge fund business is reported to be down already 50% year to date.

With one of the largest Fintech unicorn portfolios in the market that may have less than 1yr run rate (only Revolut has publicly stated that they have 2yr run rate), the risk of margin calls is substantial and the domino effect even higher.

Tiger Global Mgt is an aggressive Tiger Cub that is not Real but in these circumstances a Paper Tiger Cub that can inflict pain in several of the top tech private sectors. As usual, it is all about liquidity crises and tumbling private paper valuations. Fintech has had minimal impact in the functioning of the VC world and the allocation of capital in private capital markets.

[1] https://www.altfi.com/article/8804_tiger-global-fires-up-fintech

[2] Soft Bank had taken $7.5 Billion worth of NAV loans one year ago again from JP Morgan. https://asia.nikkei.com/Business/SoftBank2/JP-Morgan-jumps-to-SoftBank-s-No.-2-lender-with-7.5bn-in-loans