D1 Capital Partners, a prominent hedge fund, is grappling with the impact of its significant venture capital and private equity bets for the second consecutive year. The firm marked down the value of 49 companies in 2023, causing a drag on hedge fund returns. Founder Dan Sundheim revealed in an investor letter that, before accounting for fees and adjusting for various share classes with exposure to private investments, the hedge fund posted a modest 0.8% gain for the year. Markdowns of approximately 10% in the private book offset the stock portfolio’s 21% gain.
Similar to many crossover funds, D1 is aiming for a recovery following a challenging 2022 when its hedge fund endured a 30.5% loss amid a tech stock rout and declining venture capital valuations. Executives at the firm now see signs of a “thawing” in private markets and anticipate increased liquidity opportunities in the coming year.
Sundheim expressed optimism in the investor letter, stating, “Absent a substantial change in the economic environment, we are optimistic that over time valuations can continue to compound again.” The firm is actively working with management teams to assess their financial positions and prospects. Some portfolio companies are exploring strategic options, including recapitalization, sales, or public offerings.
D1’s share class, investing 35% in private assets, achieved a 3.6% gain last year, net of fees, while the venture book saw a 13% decline. This impacted gains from public stocks, which registered a 19% climb.
Private investments constitute 60% of D1’s $19 billion in assets, with the firm heavily involved in startups. Notable bets include SpaceX, Collectors Universe, Lineage Logistics, and Instacart, the latter witnessing a 25% dip since its September IPO.
Despite facing headwinds in private markets, D1’s stock portfolio boasted strong performers like Meta Platforms Inc., Microsoft Corp., Airbus SE, Amazon.com Inc., and Rolls-Royce Holdings Plc.
Sundheim conveyed that, despite equity gains, the fund is particularly enthusiastic about its short portfolio, citing high valuations for many low-quality companies with poor fundamental outlooks. The short book has substantial exposure to cyclicals across various sectors.
As D1 navigates challenges in the evolving market landscape, investors await its strategies to capitalize on emerging opportunities and manage risks effectively.
