Peter Thiel, whose Clarium Capital Management LLC lost 90 percent of assets from its peak until the end of last year, plans to invest the global macro hedge fund in what made him a billionaire: private technology ventures.
Clarium may invest a “significantly higher percentage” of assets in private equity in the near term, the San Francisco- based firm said in a July regulatory filing. The investments will include tech companies, James O’Neill, a managing director, said in an interview.
Thiel, who became a billionaire with investments in PayPal Inc., Facebook Inc., game maker Zynga Inc. and LinkedIn Corp., is steering his hedge fund to technology companies after Clarium’s assets shrunk some 90 percent from more than $7 billion in mid-2008, thanks in part to losing bets on oil prices, currencies and stocks. Demand for social-networking stocks has pushed the implied value of privately owned Facebook beyond $82 billion, leading some investors to caution that a new tech bubble is underway.
“There is a strong appetite for these Internet and emerging technology companies,” Aaron Kessler, an analyst at ThinkEquity LLC in San Francisco, said in a telephone interview. “Only a couple winners can do well for you, as Peter has seen in the past.”
Clarium LP, the firm’s main hedge fund, takes contrarian positions based on major economic trends influenced by government policies, economic cycles, new technology and commodity fluctuations, according to the company’s July registration with the U.S. Securities and Exchange Commission. Clarium, like other macro funds, traditionally has made its macroeconomic bets by trading futures, foreign-currency contracts, bonds and stocks.
Now the firm views private equity as an “attractive investment opportunity,” according to the filing.
“It was important to give our investors advance notice that we were going to potentially branch out into a new asset class,” said O’Neill, adding that Thiel wouldn’t be available for an interview. “Peter has a long and successful track record as a technology investor.”
While many investors equate private equity with leveraged buyouts of public companies by firms such as KKR & Co. and Blackstone Group LP (BX), the term has another meaning in connection with tech businesses that have yet to hold initial public offerings. For them, private-equity deals are tantamount to late-stage venture capital, with a single investment firm often committing $30 million or more, all in cash.
Late-stage deals accounted for 24 percent of venture capital financing rounds in the 18 months through June, compared with 10 percent in the same period ended 10 years earlier, according to the National Venture Capital Association in Arlington, Virginia.
‘Filling in Gaps’
“Venture funds and private-equity funds are filling in gaps where companies used to raise money from the public markets,” said Harry Weller, a general partner in the Chevy Chase, Maryland, office of New Enterprise Associates, the first venture firm to back Groupon Inc., the Chicago-based provider of online coupons. “The small tech IPO no longer exists.”
Private equity has also attracted Steve Case, co-founder of AOL Inc. (AOL), and Ted Leonsis, the owner of the National Hockey League’s Washington Capitals, who teamed up in June to open Revolution Growth Management Company II LP, a Washington firm raising $400 million to invest in 10 to 12 “technology-enabled businesses,” according to SEC filings last month.
Private-equity investments tend to produce lower returns than seed and early-stage venture deals, while the risks are also reduced because companies are less likely to fail, according to Emily Mendell, a spokeswoman for the venture- capital association.
Doubles and Triples
“You may not have the home-run returns, but you will get a double or triple,” Mendell said.
LinkedIn, based in Mountain View, California, and ranked as the largest professional networking website, soared after its initial public offering in May, with shares reaching $122.70 on their first trading day from an offering price of $45. The market value of Palo Alto, California-based Facebook surged above $82 billion as of Aug. 5 from $12.7 billion at the end of 2009, according to SharesPost Inc., a trading market for closely held companies.
Valuations are being driven in part by small investors based on the success of the Facebook website, which has more than 750 million users, and Apple Inc.’s iPad computer tablet, said Bill Glynn, chief executive officer of ISB Ventures LLC, a Dallas-based private-equity firm. Current valuations are unsustainable, he said, adding that some of these companies will share the same fate as Internet stocks that cratered when the 1990s tech bubble burst in 2000.
“Remember when AOL and Yahoo were high-fliers?” said Glynn, referring to AOL Inc., the New York based Web-services company, and Yahoo! Inc., the Sunnyvale, California, owner of the most visited U.S. Web portal. “They are nothing now.”
Thiel, 43, a graduate of Stanford Law School who previously traded derivatives for a Credit Suisse Group AG unit and practiced securities law at the New York firm Sullivan & Cromwell LLP, has a history of making both macro and technology bets. In pursuing private-equity deals, he would be adding to his earlier role as a seed investor by also focusing on more- established companies.
Thiel Capital International LLC, a hedge fund he set up in 1996 to trade futures on equity indexes, debt and foreign exchange, made the sole seed investment in December 1998 in FieldLink Inc., the predecessor to PayPal, according to a 2006 lawsuit filed by Amit Choudhury, a former business associate.
Thiel later became chief executive officer and invested his own cash in PayPal, acquiring a stake that was valued at more than $100 million after the online-payment company’s IPO in February 2002, the court documents say. That July, EBay Inc. (EBAY) agreed to pay $1.54 billion to acquire PayPal.
When the deal was completed that October, Thiel started Clarium Capital Management to carry out a macro strategy based in part on exploiting “asset price distortions,” the July SEC filing said. Meanwhile, he reinvested some of his personal wealth in technology startups such as Facebook, where he became the first outside investor by purchasing a $500,000 stake in 2004.
Thiel’s personal tech bets have prospered, lifting his net worth to $1.5 billion as of March, as estimated by Forbes, which ranked him No. 833 among the world’s billionaires. Meanwhile, Clarium has struggled since a plunge in crude prices in the second half of 2008 left the fund down 4.5 percent for the year, according to SEC documents and investor letters.
By the end of 2010, Clarium had fallen 65 percent from its mid-2008 peak, even as annualized returns since inception equaled 12 percent, according to an investor letter. Losses and redemptions had cut the firm’s assets to $462 million as of Jan. 1, according to the adviser registration.
Clarium signaled it might be making more tech investments when it closed its New York office last June. O’Neill said at the time the New York employees would be relocated to San Francisco as part of an effort to be nearer to Silicon Valley to monitor innovation.
The firm listed a second macro fund in its lineup as of March 1. Clarium Macro Investments Ltd. held $304 million, and Clarium LP’s assets fell to $129 million from $924 million a year earlier, according to the July filing.
Thiel, who added about $200 million of his own money to Clarium LP in 2009, is cited as an investor in Clarium Macro. The fund follows the same strategy as Clarium LP and invests in parallel with it in some instances, the filing said.
In addition to running Clarium, Thiel is a managing member and stakeholder in Founders Fund LLC, a venture pool whose principals include Ken Howery and Luke Nosek, co-founders at PayPal, and Sean Parker, Facebook’s founding president. “There may be circumstances” in which Clarium and Founders Fund invest in the same companies, according to Clarium’s filing.
Thiel’s roles with both Clarium and Founders Fund don’t create a material conflict of interest, the company said in the filing, “because the investment focus of the Founders Fund is generally different” from that of the macro manager, according to the filing. When the two firms invest in the same company, Clarium’s conflicts committee will be responsible for identifying and resolving any issues.
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