Charles “Chase” Coleman III earned an estimated $500 million last year as the head of Tiger Global, enough to put him in sixth place on our list of Top Hedge Fund Traders in 2011. The 36-year-old trader, a product of Julian Robertson’s fabled Tiger Management hedge-fund operation, made his millions in two ways.
The first strategy is simple: Buy large-cap glamour stocks like Apple and Priceline and hold them through a bull market for tech stocks. Apply leverage to goose returns.
The other one is closed to most investors, and in fact you stand a good chance of losing a lot of money if you try to follow Tiger Global down the same path. Coleman buys stock in companies headed toward an initial public offering — the firm reportedly holds a 1% position in Facebook worth $1 billion — and sells the stock at a huge profit to investors who can only buy in after the IPO. Sometimes that works out for other investors, but Tiger Global has also reaped hundreds of millions of dollars by selling stock in risky emerging-market technology firms that subsequently plunged in value. Longtop Financial Services, a firm Tiger Global controlled before its 2007 IPO, is now worthless after being accused of issuing fraudulent IPO filings. And Tiger’s largest single holding as of Dec. 31 was Russian Internet-services firm Yandex NV, which has skidded 50% from its post-IPO highs last year.
Coleman, a descendant of New York‘s old Stuyvesant family, doesn’t talk to the media – calls to his Park Avenue offices weren’t returned – but I constructed a detailed picture of his activities by examining the many filings his funds must make with the Securities and Exchange Commission as he buys and sells publicly traded securities. Those include 13D filings when an investor accumulates more than 5% of a company, and the S-1 firms file when they go public. Tiger Global also files a quarterly 13F-HR that lists many of its public investments.
Last year’s filings show that Coleman has earned hundreds of millions of dollars by investing in plain-vanilla growth stocks such as Apple, Amazon.com, Google and Priceline.com. It’s impossible to know how much trading he does around these positions but a conservative estimate of his profits on the 300,000 shares of Priceline he’s owned consistently at least since the beginning of 2009, for example, is $117 million. He more than tripled his reported holdings of Priceline last year as the stock surged from around $300 to a current $630, making another $60 million or so in the last few months on additional purchases.
Investors fared much worse with another successful Tiger investment, Longtop Financial Technologies. The fund purchased about 10 million shares for $3.68 to $6.43 a share in 2006, with Tiger executives Lee Fixel, Scott Schliefer and Feroz Dewan all purchasing additional stakes in their own names. Public filings suggest Tiger managed to sell at least 6.4 million shares as the stock soared to $40 after its IPO at $17.50 in November 2007, taking in $150 million or more in profit. Longtop shares crashed to zero last year after the firm was accused of accounting irregularities and the SEC revealed it was investigating auditor Deloitte Touche. Tiger might have reaped as much as $250 million by bailing out of another risky Chinese company, biodiesel producer Gushan Environmental Energy. Tiger owned 17 million shares when it went public in December 2007, including 7.5 million shares purchased for $3.63 apiece the year before. That stake was down to 15 million shares by the end of 2008, after Gushan shares had soared above $70, and
3.4 million shares by December 2009. With adept enough trading, Tiger’s profits may have been $250 million or more. Gushan’s current price is $1.50. Not all of Tiger’s pre-IPO investments have turned out badly for those who bought in later. Tiger owned 1.7 million shares of Argentine e-commerce outfit MercadoLibre before its 2009 IPO, along with savvy investors like E-Bay and Goldman Sachs. It probably made at least $250 million before selling out of the position in early 2011. The shares are currently trading around $100, more than five times the IPO price. And the firm scooped up 3.7 million shares in LinkedIn at a weighted average of less than $17 per share before that company’s May IPO, making for a paper profit of at least $250 million at LinkedIn’s current price of $86.
“He invests in these things when they’re already at a couple hundred million in revenue,” one hedge-fund executive who knows Coleman told me. “He’s not a VC guy, but he’s help create valuations of these companies at the pre-IPO stage.”
This executive also says Coleman “shorts very well” and may have made more money last year shorting public equities than he did buying them. Market Folly reported last year that Tiger Global had a gross exposure, or investments plus leverage, of 139% with net long exposure of only 45%. But that report also said Coleman had informed his investors that “it has become increasingly difficult to source attractive short opportunities and size them appropriately. It has also become challenging to take meaningful long positions in certain smaller capitalization companies, particularly in emerging markets.”
Another investor who is familiar with Coleman’s strategy characterizes it as a consequence of “regulatory asymmetry” that allows sophisticated investors to buy shares in companies that have delayed their IPOs as long as possible to avoid the costs of complying with Sarbanes-Oxley and other regulations. By trying to protect retail investors, in other words, the government has created a huge opportunity for hedge funds to make profits that would have flowed to ordinary investors if they’d been able to buy in earlier.
Of course, this strategy is not without risk. Yandex shares jumped 55% after their $1.5 billion IPO last year, in which Tiger Global sold 7.5 million shares for a possible $100 million profit. But the hedge fund was still sitting on 54 million shares as of Dec. 31, according to its 13F filing, a position that had lost $800 million in value as the Russian Google competitor’s shares have steadily declined from a post-IPO high of $38. With a paper profit of perhaps $1 billion, Coleman can afford to see the stock price fall more. But trading out of the position will be tricky.
The strategy of buying into companies after the VCs and before the IPO “works only three or four years out of every 10, as it’s really an arbitrage late in bear markets and early in bulls,” a rival trader tells me. Having racked up huge profits by jumping in ahead of retail investors at least since 2006, Coleman may be operating on borrowed time.
Read More: http://www.forbes.com/sites/danielfisher/2012/03/01/tiger-globals-coleman-gets-rich-off-ipos-long-before-you-see-them/