Hedge funds flock to Silicon Valley

This is an audio transcript of the FT News Briefing podcast episode: Hedge funds flock to Silicon Valley

Marc Filippino
Good morning from the Financial Times. Today is Monday, September 13th, and this is your FT News Briefing.

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Marc Filippino
Voters in Norway are headed to the polls today and climate is top of mind. We’ve got the latest news about Beijing’s big tech crackdown. Meanwhile, Ireland’s data privacy watchdog is under fire for going too easy on Big Tech. Plus, Silicon Valley is famous for venture capitalists backing innovation tech start-ups. Now another kind of financier is elbowing in.

Laurence Fletcher
You get the sense that hedge funds have moved in a sort of decisive way into this market, and they’re here to stay for some time.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Marc Filippino
In Norway, voters head to the polls today for national elections, and climate is taking centre stage. This is a country where oil has long been central to the economy. But a dire report about the rate of climate change just out from the United Nations has fuelled support in Norway for more environmentally friendly policies. The FT’s Richard Milne has more.

Richard Milne
Climate has lurked in the background in Norwegian politics for a long time. But I think it’s fair to say that this year’s elections, it was hard to say what they were about really up until this report. But this report is sort of really given a vitamin boost to environmentalists, not least the Green Party, which, as you imagine, is very vocal on this. Their membership grew by a third in just a couple of weeks. But also there are some smaller parties on both the left and right that have picked up support. And it really has become what several leading politicians said to me, the “climate election”.

Marc Filippino
Richard, how dependent is Norway on its oil industry right now and are there plans to scale it back?

Richard Milne
It’s the biggest industry in Norway. It’s of declining importance in terms of the number of jobs is going down. But it’s still the biggest industry. It’s still very important. It’s something that it’s it’s hard to scale back. Actually, Norway’s oil production, which had been pretty consistently declining from sort of 2000 onwards, has actually risen in the last couple of years.

Marc Filippino
How divided are voters on the issue of climate and oil? Is it top of mind?

Richard Milne
Yeah, this is a divisive issue. More Norwegians favour keep on going with the oil industry. This is, after all, what made them rich. But there’s an increasing number, particularly among the young, who are very environmentally focused. And so this becomes a bit of a clash. But you even see it in Stavanger, which is the oil capital. It’s like the Houston of Norway. And, you know, the mayor has said, you know, she doesn’t call her town the oil capital deliberately. This is something where I think some Norwegians are thinking about, you know, how history is gonna view them of having got rich on oil and what that means.

Marc Filippino
Richard Milne is the FT’s Nordic and Baltic bureau chief. Thank you, Richard.

Richard Milne
Yeah, thanks a lot.

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Marc Filippino
Chinese officials are continuing to restructure Jack Ma’s financial services conglomerate, Ant Group. The FT has learned that Beijing wants Ant to break up its financial super app called Alipay. This app has more than a billion users. Regulators want a separate app for the company’s lending business and will also turn over user data to a new credit scoring joint venture. And this joint venture will be partly owned by the state, according to FT sources. One of those sources said that Beijing sees Big Tech’s monopoly power coming from their control of data, and it wants to end that.

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Marc Filippino
An Irish non-profit says its country’s data protection watchdog is giving US Big Tech companies a free pass. Google, Facebook, Apple and other American tech giants all have their European headquarters in Dublin. That means Ireland’s data protection watchdog is the lead regulator when it comes to enforcing EU law on them. But the Irish Council for Civil Liberties did an analysis and found that almost all privacy abuse complaints filed against these companies remain unresolved. Compare that to Spain, which has a smaller budget for data protection than Ireland, but it’s more active. Other EU countries have criticised Ireland’s reluctance to police Big Tech. Ireland’s Data Protection Commission did not respond to the FT’s request for comment.

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Marc Filippino
Silicon Valley is that legendary pocket of innovation in northern California. It’s where entrepreneurs meet with venture capitalists and turn their ideas into billion-dollar technology empires. But in recent years, hedge funds have been muscling into Silicon Valley. This year, they’ve done nearly 800 deals, according to a report from Goldman Sachs that already beats last year’s record. To talk more about this, I’m joined by the FT’s hedge funds correspondent Laurence Fletcher. Laurence, first of all, money is money. What does it matter that start-ups are backed by hedge funds or venture capitalists? What’s the difference here?

Laurence Fletcher
Now, it’s a good question actually, Marc. I mean, often private equity or venture capital and hedge funds are sort of lumped together as being almost the same thing. But in reality, they’re actually quite different types of investors. Private equity or venture capital, they tend to lock up investors money for quite a long time. And as the name suggests, they invest in private companies. They don’t tend to turn over their portfolios very often. Hedge funds, in contrast, tend to be focused on public markets, more liquid assets and that sort of thing. And their investors can get access to that money far more readily, usually on a monthly, maybe quarterly basis as well. So therefore, hedge funds have historically tended to stay in more liquid assets, more public markets generally, than to have stayed on their own turf. But that’s starting to change.

Marc Filippino
So why is this happening? Why are hedge funds getting interested in Silicon Valley?

Laurence Fletcher
Yeah, it’s it’s been a really interesting past decade, actually. I mean, before the global financial crisis was sort of the golden age of hedge funds. But this last decade has not been a great time for hedge funds, to be honest. They’ve struggled in the public markets. They trade because central bank quantitative easing, which has suppressed volatility, that’s made a lot of that clever trade sort of not look very clever when compared with cheap passive tracker funds, actually. In contrast, private equity have had a fantastic time. As public markets have soared, so have private markets as well. And their returns have, according to Goldman Sachs, been roughly double on average annually over the past decade. So basically, the hedge funds have been enviously eyeing their private equity rivals and thinking, OK, we want some of that, actually. We can see the higher fees that the private equity funds, venture capital funds are charging. We can see the longer lockups they have on their clients as well. And they want in on the action, essentially.

Marc Filippino
So, Laurence, do you see this as a long-term shift or is this, you know, just kind of a blip?

Laurence Fletcher
I think it’s a gonna be a shift for some period of time. I don’t know if it’s gonna to be permanent or not, but you get the sense that hedge funds have moved in a sort of decisive way into this market, and they’re here to stay for some time. I think longer term, there are potentially questions over the amount of money that have gone. It has gone into private markets in recent years. A lot of big allocators have been shifting that way. And if you start to see that market deflate in any way, then you might start to see the hedge funds say, wait a second, let’s let’s get out of here, which could also prove quite difficult given the liquidity terms of some of the assets they’re buying. But I think for the moment, this is a sort of fairly big trend that’s here a number of years.

Marc Filippino
How are venture capitalists responding to all these hedge funds on their turf?

Laurence Fletcher
It’s a really interesting one actually because in some ways they are competitors to the hedge funds that are coming in. But also in some ways is actually quite good for the venture capital. There’s sort of anecdotal talk that some of the early-stage venture capital are really happy that the hedge funds have come in because now when they sell on earlier-stage sort of companies to late-stage investors, actually there’s a ready pool of buyers now amongst these hedge funds that are there. So in some ways, it works quite nicely. For those that are competing directly with a hedge fund, it’s a bit more difficult because the hedge funds reckon they’ve got a bit of an edge essentially on the private equity funds. And that edge, they say, is because they are trading both the public markets and the private markets as well. So there’s a yeah there’s certainly a strong proposition that hedge funds have relative to the VCs at the moment.

Marc Filippino
Laurence Fletcher is the FT’s hedge funds correspondent. Thank you, Laurence.

Laurence Fletcher
Thanks, Marc.

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Marc Filippino
Before we go, let me ask you a question. How do you feel about working from home? Do you like logging in from the couch, maybe in your pyjamas, or do you miss the office? And are you under pressure to go back? I’m asking because the FT is conducting a survey about the return to office and we wanna hear from you. We’ve put a link to the survey in our show notes, and we may end up using your responses in an FT story. So thanks for helping us out. You can also go to the show notes to find links to all the stories we mentioned in today’s FT News Briefing. Make sure you check back tomorrow for the latest business news.

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