Tech. Private Equity Venture Firm Launches Hedge Fund

Feb 1 2008 | 8:34am ET

A private equity and venture capital firm has made its first foray into hedge funds. But the move is not much of a departure for Newlight Management.

The New York- and Jericho, N.Y.-based firm recently held a first close on its third fund, the Newlight Horizon Fund. Like its predecessor funds, Horizon will focus on micro-cap technology funds. But it will focus exclusively on publicly-traded companies, continuing an evolution that began eight years ago.

The firm’s second fund was originally slated to be a “classic early-stage venture technology fund,” according to managing director Douglas Miscoll. But when the tech bubble burst in 2000—as the firm was raising the $70 million fund—Newlight decided to take a different route, changing the fund’s focus to later-stage investments. Two years later, intrigued by the performance of several public companies to which it had sold portfolio companies, the partners decided to add public equity to its private equity fund.

“We found market-leaders that were growing, profitable and, in some cases, trading for less than their cash accounts,” Miscoll said. “It looked pretty compelling.”

The strategy worked like a charm. The public equity portfolio, which eventually made up one-third of the fund, enjoyed triple-digit annualized returns over its five-year lifespan. The decision to add a stock portfolio helped make the fund “one of the very best of its generation.”

Newlight Horizon will pick up where its predecessor, which has been almost completely liquidated, left off. The fund focuses on listed companies with market capitalizations of between $50 million and $500 million, although it will consider all technology names within the micro-cap universe (market caps of $1 billion or less). The long-biased fund launched with $20 million—primarily capital from its managing directors and investors in Newlight’s earlier funds, mostly high net-worth individuals and family offices. It has a hard cap of $200 million.

Miscoll said he and his three partners—all of whom play a role in portfolio management—will use their backgrounds in venture capital and technology company management to their advantage.

“This is not a trading strategy, it is a very research-driven, deep-value strategy,” he said, adding that the firm expects the average holding period for stocks in the fund to be between two and four years.

“Shorting individual names is not a central part of what we do,” he said, though Horizon will employ a hedging strategy, shorting exchange-traded funds and employing an active options strategy. And while the fund can use as much as 25% leverage, Miscoll said he expects it will use very little initially.

Newlight Horizon charges a 1.5% management fee. The performance fee will depend on how well the fund does: Investors will pay 15% if the fund returns 15% or less, 25% if it returns more than 15%. UBS serves as the fund’s prime broker.

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