Hybrid Fund Investing: Crossing Over from Public to Private Markets (and Back Again)
Chuck Murphy
Spring 2023
Course Objectives
The purpose of this course is to provide students with broad exposure to investment strategies that straddle public and
private equity markets, which are increasingly prevalent in today’s landscape.
Participating in private markets has become an imperative for traditional equity hedge funds and long-only funds for
three primary reasons:
o Entrepreneurs and CEOs of strategically interesting companies are opting to remain private for longer periods
of time – or are achieving scale faster than they have done historically and while privately-owned – leading to
enormous wealth and value creation within the private domain.
o Capital owners, such as pensions and endowments, have become more comfortable with illiquidity and
institutional allocators enjoy being insulated from mark-to-market fluctuations – which is entirely illusory, but
nonetheless a real-world dynamic. Smaller liquid equities exposures are increasingly being served by quant or
passive strategies.
o Tech-enabled tools and AI/ML continue to erode human “edge” in fundamental equity analysis. Professional
relationship networks have been commoditized and alternative data is ubiquitous, leaving private company
data and insight as perhaps the “final frontier” of information edge in public markets.
At the same time – and for many of the same reasons – private markets are becoming brutally competitive and
increasingly efficient, leading savvy funds to seek public markets capabilities to differentiate themselves. This runs the
gamut from developing “outside-in” (public company style) diligence processes to pre-empt auction processes to
raising SPACs to building dedicated public equities efforts either inside or alongside private funds.
Lastly, there is a growing recognition amongst various capital market participants that it is possible (and profitable) to
repeatably exploit inefficiencies that exist between traditional public and private market silos. Such “opportunistic”
fund vehicles are rapidly becoming an asset class of their own.
In this class, students will be introduced to a variety of hybrid public/private equity investing strategies and situations,
including (pre-IPO) crossover funds, tactical opportunity funds, SPACs, PIPEs, take-privates, and more. We will discuss the
key similarities and differences between public and private investing, highlighting areas of synergy (and dis-synergy) in the
investment process. Teaching methods will include an upfront review of hybrid investment frameworks, hands-on analysis
of case studies and real-life situations, and insights from many guest speakers.
Students who complete this course will be able to:
Understand how and why hybrid public/private investing is changing the buy-side landscape
Distinguish between different hybrid investment strategies and their unique attributes, strengths and weaknesses
Be mindful of key legal and compliance factors related to private company data and stock trading
Identify potentially actionable investment ideas at the intersection of public and private markets
o Articulate from first principles why a given company should (1) raise a private round, (2) sell to a SPAC, (3) file
for an IPO, or (4) raise a PIPE
o Leverage private market insights to develop public equity themes and stock ideas
o Source potential private opportunities from analysis of public companies
Develop a common analytical framework for evaluating public and private investments
o Adapt public company-style research and valuation frameworks to private companies
o Incorporate private company frameworks into stock analysis
o Balance depth and breadth of analysis across the hybrid investment portfolio
Outline key considerations for structuring a private or crossover round, PIPE, etc.
Think and act like a partner to management teams following transaction completion or stock purchase
REQUIRED PREREQUISITES AND CONNECTION TO THE CORE
Core Course Connection with Core
Corporate Finance 1. Cost of Capital
2. Valuation
3. Financing Options
4. Time value of money
5. Opportunity cost (of capital)
6. The Capital Asset Pricing Model (CAPM)
7. Firm Valuation Model
Financial Accounting 1. The “accounting equation”
2. Revenue and expense recognition
3. Resources and obligations – measurement and disclosure
Global Economic 1. Risk Management
Environment 2. What is Gross Domestic Product and how is it measured?
3. What causes inflation?
4. What causes changes in exchange rates?
5. What are the causes of business cycles?
6. What are the effects of monetary policy?
7. What are the effects of fiscal policy?
8. What is the role of financial markets in the economy?
Managerial Economics 1. Barriers to entry
2. Moats
3. Maximization and thinking on the margin
4. Analyzing complex decision-making under uncertainty
5. Decision-based cost analysis
6. Pricing with market power
7. Market segmentation and other advanced pricing strategies
8. Understanding market competition and equilibrium thinking (in the
short-run)
9. Market equilibrium thinking (in the long-run) and barriers to entry
10. Strategic interaction among firms and Nash equilibrium
Strategy Formulation 1. Trade-offs, value-added, efficiencies
2. Creation of value vs. value capture
3. Competing firms
4. Competition and Complementors
5. Strategic interaction analysis
6. Diversification and scope
7. Ethics & IBS
8. Behavioral and evidence-based strategy
9. Management
METHOD OF EVALUATION
Final Project 50%
Homework Assignments 25%
Class Participation 25%
MATERIAL
Required reading throughout the term includes:
1. Literature Pack: Hybrid and Crossover Investing
2. Literature Pack: PetSmart & Chewy Transactions
3. Book Excerpt: The Founder’s Mentality (Allen James & Chris Zook)
4. Book Excerpt: The Power Law (Sebastian Mallaby)
5. SEC filings related to companies we are studying, company call transcripts and other available data
6. There may be other short books or articles assigned related to speakers or topics of interest as the semester
progresses.
**There are no good textbooks for this course. We assume because you are in an advanced security analysis class at
Columbia you have read at least parts of the following books:
Greenwald et al, Graham and Dodd’s Security Analysis, Sixth Edition
Greenwald and Kahn, Competition Demystified, A Radically Simplified Approach to Business Strategy
Lectures Outline
1. Foundational Concepts of Hybrid/Crossover Investing (Strategy = ‘Edge’):
1. What is hybrid investment? What do we mean by hybrid investment?
2. The hybrid investing landscape (‘industry map’): crossovers, tac opps, SPACs, PIPEs, etc.
Data collection: Returns, Risk (betas?), capital invested
World markets: Is hybrid just a US phenomenom?
Who are the main actors in this space?
3. Why have private markets been taking off over the last two decades?
The drop in costs of staying private
The higher costs of going public
Common attributes of public vs. private companies and implications for analysis
Cost / benefit tradeoffs of staying private vs. going public
4. What is the logic driving public/private market convergence on the buy-side?
Notable examples of public-oriented firms entering private markets, and vice versa
5. Fund structures (side pockets, dedicated, hybrid, evergreen) and implications for strategy
6. A deep dive on crossover funds – how they create ‘edge’ by seeing public & private opps
Here pick an example
7. Where is the industry going? Where is the course going?
8. Reading Assignment [TBD]
2. Private or Public? Why and How: First Big Case (Petsmart/Chewy)
1. Exceptions that prove the rule: venture-stage in public markets and late-stage private co.’s
What does this analysis tell us about what it means to be private vs public?
Business challenges best dealt with in private vs public (e.g., mgmt. team rebuild,
significant business model pivot (e.g., offline to online, etc.))
What are the financial characteristics that make a private growth co suitable for the
public markets? How do you know when it’s time to write the S-1?
2. Skills necessary for management teams in public vs. private contexts
What does good (i.e., strategic) “investor relations” look like in both contexts?
3. Skills necessary for investors in public vs. private contexts
Being a good (“value added”) board member or observer
Not just evaluating, but also choosing the CEO and independent directors
What are the key skills and experiences the board/investors are missing?
4. Managing your career in a hybrid fund
How do you go from being an analyst to being the top honcho?
5. The Petsmart / Chewy case study
Background on the original PetSmart stock position – owned 5% of O/S shares
o Teaching point #1: top-down thematic idea generation (“humanization of pets”)
Company hit rough patch in ’14 – doubled position, wrote public letter urging go-private
o Teaching point #2: confirmation bias is bigger issue in crossover vs LO or L/S
Rolled stock (tax free) into go-private transaction led by BC – took 2 board seats
o Teaching point #3: tax considerations and opportunities in crossover investing
Take-private transaction overview – valuation, sources & uses, equity cap table, etc.
Recruited industry director (former PetSmart COO) to board
o Teaching point #4: industry directors’ profile should match value creation plan
First 12-18 months – quick wins (e.g., pricing), monetized non-core asset, dividend
Online disruption begins to “bite” led by pure-play Chewy – build vs buy?
Convinced other board members to pursue purchase of Chewy despite sticker shock
o Teaching point #5: leading through influence, not control – soft skills
Chewy purchase transaction overview — valuation, sources & uses, structuring, synergy
Manage separately from one Board – PetSmart for cash, Chewy for growth
Chewy exceeds $4bn run-rate, passes Petco to become #2 pet retailer – go public?
o Teaching point #6: size matters but is not sufficient — metrics need to be stable
File S-1, roadshow rehearsals, attend bell ringing ceremony at NYSE
IPO transaction overview – valuation, sources & uses, early trading activity
Case summary – total value creation vs cost basis, review of teaching points
Reading assignment [TBD]
3. Idea Generation (Top-Down/Thematic & Bottom-Up/Opportunistic): Frameworks, Tools and Case
Studies
1. You can invest in anything – now what? How crossover investors narrow the landscape
Two broad approaches: (i) top-down, or thematic, and (ii) bottoms-up
Whatever your approach, always extract relationships and insight from sourcing process
o Related considerations around ethics, compliance and knowledge management
2. Overview of thematic approaches to idea generation
Using public co data to identify themes that extend to private markets (and vice versa)
o Thematic analysis should drive not just type of business but stage in its lifecycle
Mini-case study: digital payments / Gen Z consumer preferences / near-shoring (TBD)
Case study in practice: Finding “copies” of domestic internet cos abroad (Tiger Global)
3. Overview of “bottoms-up” sourcing approaches
Identifying high hit-rate partners, collaborative investors, and other sourcing channels
Managing an inbound deal funnel — sorting the wheat from the chaff
Case study in practice: dedicated sourcing functions (TA Associates / Summit Partners)
Case study in practice: sorting with unit economic guardrails (Valor Equity Partners)
4. Victory from defeat: monetizing ‘dead deal’ costs + harvesting insights from trading losses
5. Assignment #1: select a top-down theme (from a provided list) and create a detailed
presentation (i) analyzing its rationale, (ii) sourcing channels and potential partners, and (iii)
targeted list of public and private investment candidates
4. What’s the same vs. what’s different? Diligence & Valuation:
1. Crossover investing is more process intensive than traditional public equities (but less than PE)
2. Your diligence process will be shaped by the type of capital raising or sale process
Overview of process types and key charactertics: auctions, limited auctions, and pre-
empting a process (i.e., directly negotiated transactions)
3. Generic deal timeline (TBD – late stage / control buyout / auction) and key diligence steps
Speed as a weapon: methods and common shortcuts for accelerating speed of diligence
4. Key diligence materials and their public market analog: e.g., QofE = 10-K, CIM = initiation report
5. Valuation basics: primary vs. secondary raises, pre- and post- money valuation mechanics
6. Just like public equities, crossover investing is highly competitive and therefore it is necessary to
take a variant view on, e.g., a late stage growth or pre-IPO round, as well as a stock
7. Unlike tradition public equities or PE/VC, crossover investors must understand the opportunity
cost of any new investment — framing a growth deal vs buying stock in a public comp
8. Case study: TBD – walk through of growth stage diligence memo, incl. all above elements
9. Presentation of Assignment #1 + Class Q&A
10. Assignment #2: Building on Assignment #1, students are given CIM/pitch deck plus detailed
equity cap table, Pitchbook readout (details of the prior rounds), and draft term sheet for a
private co from their prior thematic work. Value the business; explain whether you want to
invest, whether or not you’d rather own the closest public comp (requires valuation of that too).
5. Crash Course in (Mid/Late Stage) Deal Negotiation & Structuring:
1. Lead vs. co-lead vs. follow-on – positioning for success
2. Negotiating strategy: what do founders want? What do investors want?
3. Case study: TBD – moderated discussion w/ founder at Series C (or later) company who recently
raised – discussion of key negotiating points, how they were resolved, etc.
4. Security types (e.g., preferred vs common, liquidation preference, “top of the stack” vs flat
structures) and implications for valuation
5. Anatomy of a Term Sheet – key terms and provisions + NVCA standards
Guest lecture: Stephane Levy, NYC-based Partner @ Cooley, on market norms
6. Terms that crossover investors usually care about most and why – e.g., anti-ratchet, lock-ups
7. Situation-dependent terms – e.g., pro rata rights, negative covenants
8. Post-term sheet syndication – bringing in value-added partners
9. Presentation of Assignment #2 + Q&A
10. Assignment #3: Building on Assignment #2, students are provided bios of mgmt team and board
members for their assigned co. Tasked with developing value creation plan and KPIs, as well as
evaluation of mgmt and board, and recommendation of industry board member.
6. What’s the same vs. what’s different? Monitoring & Exit:
1. Translating your investment hypothesis into a value creation plan for the business
Walk through examples of value creation plan documents
Mini-case: TBD – investor walks thru thesis on business and how that informed value
creation plan + post-mortem
2. Formulating KPIs and metrics for monthly reporting – review examples
3. Sizing up the mgmt team and board — what skills and experiences are resident? Missing?
Role of lead investor in management and governance changes
4. Navigating the board room – leading through influence vs. control – guides for conduct
Guest speaker: TBD – moderated dialogue with seasoned investor / board member
5. What do founders/CEOs want from their investor / board members?
Guest speaker: TBD – bringing firm capabilities to bear (e.g., HR, Cap Mkts)
6. Mapping exit options – who is the ideal next owner? Assessing IPO readiness
7. Presentation of Assignment #3 + Q&A
8. Putting it all together (once again) – decision tree or flow chart summarizing course
