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(Bloomberg) — Big bets on venture capital and private equity weighed on hedge fund returns for the second year in a row, as D1 Capital Partners slashed the value of 49 companies in 2023.
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D1 founder Dan Sundheim said in a letter to investors obtained by Bloomberg that the hedge fund’s exposure to private investments was only 0.8% before accounting for fees and adjusting for share classes that differ in exposure to private investments. He wrote that he ended the year with A roughly 10% drop in private books eroded his 21% gain in the stock portfolio.
Like many crossover funds, D1 is aiming to bounce back from a tough 2022, when hedge funds fell 30.5% as tech stocks crashed and venture capital valuations plummeted. Now, company executives are beginning to see a “thaw” in the private markets and expect more liquidity opportunities this year, Sundheim told investors in a letter.
“We are optimistic that valuations could continue to rise again over time, barring any major changes in the economic environment,” he said. The company is working closely with management to assess its financial condition and outlook, he said. “Several of our portfolio companies are considering strategic options, including recapitalization, sale, and public offering.”
The stock class, which invests 35% in private equity, rose 3.6% net of fees last year, while the venture book fell 13%, according to people familiar with the matter. This put pressure on public stock returns, which rose 19%.
Private bets account for 60% of New York-based D1’s $19 billion in assets, according to the letter. The company, which debuted in 2018, has been focusing on startups in recent years. Its biggest bets include Elon Musk’s SpaceX, Collector’s Universe and Lineage Logistics. The company also owns stock in Instacart, which has fallen 25% since its initial public offering in September.
Since its inception, the company’s private books have generated a net internal rate of return of 15.5%, the letter shows.
Bets on other stocks fared much better. D1’s best-performing companies include Meta Platforms, which nearly tripled last year, as well as Microsoft Corp., Airbus SE, Amazon.com Inc. and Rolls-Royce Holdings Inc.
Despite the stock’s rally, D1 is “even more excited about our short portfolio,” Sundheim said in the letter. “There is a lot of good news baked into valuations, and even in a rosy scenario we were able to find many low-quality companies with poor fundamental prospects that were trading well above their intrinsic value. ”
The company’s short-term assets have high exposure to economic cycles across a variety of sectors, the letter said.
A D1 spokesperson declined to comment.
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