Nate Koppikar never thought he’d be talking to the investors in his hedge fund about Kim Kardashian. Or, to put it in financial jargon, there was a “low but non-zero probability” that her name would come up in a letter. But then, he notes, Kardashian “is not just a reality TV star anymore. Now she’s a private equity titan.”
And Koppikar’s fund, Orso Partners, has a big short on private equity.
Last fall, Kardashian launched private equity fund SKKY Partners with former Carlyle Group executive Jay Sammons. Less than a month later, Kardashian settled charges with the Securities and Exchange Commission for promoting a crypto token without disclosing that she’d been paid to do so.
To Koppikar’s mind, Kardashian’s move into private equity was a red flag, a “sure sign that the top is in for the illiquid private asset class.” The easy-money environment of recent years had made investing seem almost effortless, leading private investors to forsake due diligence for hanging out with celebrities — and using them to pitch their wares, he argues. Raising money was all that mattered.
San Francisco-based Orso, the short-dedicated hedge fund Koppikar launched in 2019 with Scott Matagrano, keeps a running tally of celebrities involved in private equity and venture capital, including such names as Serena Williams, Sean “Diddy” Combs, Jay-Z, Alex Rodriguez, Tyra Banks — and the list goes on. According to Koppikar, it is all about capitalizing on the “influencer” movement and the so-called democratization of finance that led inexperienced investors to lose their shirts via an app with the virtuous-sounding name of Robinhood.
Why focus on Kardashian? “It is ultimately fitting that America’s most famous reality TV star has gone into private equity,” Koppikar wrote in a letter to investors last fall. “Reality shows are scripted and fake. When the S&P 500 falls 25 percent, growth stocks fall 65 percent-plus, and private investment firms massively overweight growth claim that their private investments and real estate are up in 2022, there is no better way to describe it than ‘Scripted and Fake.’”
A veteran of the private equity world himself, Koppikar thinks more bad news is ahead for the asset class. He’s shorting private equity’s publicly traded asset managers, which he thinks will be among the biggest losers in what he foresees as a coming recession — one that will be different from 2008 because private equity credit funds, not the banks, are now holding the riskiest credits.
This year’s stock market rally has meant a tough start for short sellers like Orso, whose performance is typically quite volatile. But in 2022, Koppikar’s timing as Orso’s portfolio manager was spot on. “Nate’s genius is a God-given talent,” says partner Matagrano, who handles research at the fund. “He knows in which ponds we should be fishing and which ponds we should be avoiding because he has a very acute macro sense.”
Shorting big tech in 2022 might appear easy in hindsight. But at the beginning of last year, Koppikar worked hard to convince Matagrano and Orso’s COO and CFO, Bob Morelli, that they should do what was at the time unthinkable in financial circles: short Facebook.
“I’m thinking, ‘How are we ever going to get a research edge in a company as big and vast as Facebook? And how dangerous is it for us to be thinking about shorting big tech right now?’” Matagrano recalls. But in the end, Koppikar’s analysis proved prescient. “It was probably the most spectacular trade I’d ever seen,” Matagrano says.
Orso then went on to short Alphabet and Amazon as well as the VC-backed growth stocks owned by Tiger Management descendants’ crossover hedge funds — ones that also invest in venture capital. (One of Koppikar’s most memorable lines is a dig at DocuSign, a stock formerly owned by Tiger Global Management: “At peak, a company that quite literally should have been a basic feature in Adobe PDF was valued at $50 billion.”)
For Koppikar, targeting Tiger growth stocks was a way of shorting the “bad valuation marks” that he argues are prominent in the private investment industry. As he cast his gaze on what would come next, last summer he landed on publicly traded private equity giant Blackstone, largely because he predicted that its Blackstone Real Estate Income Trust, sold to retail investors, would struggle in the face of falling real estate prices and investor redemptions — which is precisely what has happened. Redemption requests from investors in several Blackstone real estate funds — both institutional and retail — were so high late last year that the respective funds put up their gates, which is a collective 5 percent redemption per quarter. By January BREIT alone had more than $5 billion worth of redemptions, with some $1.3 billion returned to redeeming BREIT investors that month.
“They were just making ridiculous stories that somehow they’re special, and they’re not special,” says Koppikar. “I think the important thing in our investment philosophy is: No one is special and no one does anything that differently.”
Except maybe Orso, which last year far outdid not only the markets but its short-selling peers: The fund ended 2022 with a net gain of 70.4 percent, according to a recent investor letter.
The stunning return is all the more remarkable considering how difficult short selling has become in recent years.
Just two years ago, short sellers were practically given up for dead following the big short squeeze on GameStop Corp. that eventually led hedge fund Melvin Capital to lose so much money shorting the brick-and-mortar video-game retailer that even a $2.75 billion investment from Ken Griffin’s Citadel and Steve Cohen’s Point72 couldn’t save it.
The GameStop saga was the tipping point of the troubles bedeviling short sellers, who had been under siege for the better part of a decade as the bull market roared on relentlessly. The only short sellers who seemed able to make a go of it were the outspoken activists — those who target companies they deem to be frauds, publicize their findings, and quickly cover most of the short after the stocks fall on their reports. While successful, the practice became a source of controversy, and by 2021, two of the biggest names in that business — Muddy Waters’ Carson Block and Citron Research’s Andrew Left — found themselves the subject of a criminal investigation, even as they insisted they’d done nothing illegal. As the probe lingered in 2022 with no end in sight, some short activists struggled, making returns in the single digits as the stock market fell almost 20 percent.
Orso’s strategy harks back to an earlier model that played the game behind the scenes, with little public fanfare. (Koppikar is loath to do on-the-record interviews and only agreed to cooperate with this author after being asked several times.) Notably, neither Orso nor its principals are part of the investigation that has snared other short sellers in one fashion or another. Orso’s ideas, at least those expressed in the lengthy letters the fund sends out quarterly, don’t typically overlap with those of activists, either.
Yet in just four years, Orso has grown much bigger than its peers — without anyone taking notice. To be sure, short-dedicated funds aren’t particularly large. Short sellers say that only about 20 allocators invest in the strategy, mostly endowments and family offices, and the long bull market has tempered their enthusiasm. At the end of 2021 — the most recent period for which numbers are publicly available — Orso had $350 million in regulatory assets under management, making it bigger than both Muddy Waters ($245 million) and the firm run by legendary short-seller Jim Chanos ($288 million).
Other short sellers have fared worse. In the middle of the past decade, Matagrano, now 48, was working at what was then one of the most highly regarded short-selling hedge fund firms: Sophos Capital, helmed by Jim Carruthers. Carruthers and Matagrano had gained fame running the short book at Dan Loeb’s Third Point, which they left in 2013 to start their own firm. But the difficulties facing short sellers led Sophos to deregister from the SEC in 2021, and by the end of that year, the fund held less than $10 million in regulatory assets under management. Two years earlier, that number had stood at $1.16 billion. (Matagrano left Sophos in 2018.)
Koppikar, now 35, has experienced his own share of turmoil — largely of the legal variety. Between 2016 and 2018, he was a partner at now-defunct Sparrow Fund Management, a long-short fund backed by Tiger Management’s Julian Robertson that found itself embroiled in litigation surrounding the famous short of biotech firm MiMedx Group, whose CEO Pete Petit eventually went to prison for securities fraud.
In an unprecedented move, Sparrow sued both MiMedx and its attorneys at Sheppard Mullin Richter & Hampton LLP and Wargo French LLP, who had filed a lawsuit against the hedge fund. In its complaint, Sparrow argued that it was so hard to raise money under the cloud of litigation — especially because MiMedx had falsely accused Sparrow of criminal activity — that the fund went out of business.
According to Sparrow, MiMedx had sued the hedge fund in an effort to find the real identity of a pseudonymous short seller called Marcus Aurelius Value who was publishing reports critical of the company. MiMedx said that Aurelius Value and Sparrow were one and the same. Sparrow argued that MiMedx’s attorneys knew Sparrow was not Aurelius Value but believed Koppikar knew the identity of Aurelius Value and were trying to force him to disclose the name.
“They sued the wrong person knowingly, then refused to drop it until we told them the name of somebody. Just think about how crazy that is,” says Koppikar. (MiMedx has denied the allegation.)
During the four-year legal ordeal that transpired, Koppikar developed a distaste for the corporate legal community that he tangled with. “The lawyers are protected. The whole system is designed to give them wide latitude to push the envelope,” he says. While most short sellers agree, they typically do not sue their opponents’ counsel. “It’s difficult to hold lawyers accountable despite all of the clearly abusive lawsuits,” says Muddy Waters’ Block.
The lawsuit against Sheppard Mullin and Wargo French is something Koppikar considers a badge of honor. “It was not easy,” he says. “But we were financially capable enough and legally savvy enough to pursue them. We fought the bullies.”
The case was finally settled in 2021 for an undisclosed amount after Koppikar managed to learn stunning details of the attorneys’ work — including that they had hired a private investigator who had followed Koppikar into a bathroom and chatted him up. “We got their PI’s report. I’m reading it and I’m like, ‘Wow, what a weirdo,’ because the bathroom, by the way, was disgusting,” he says. “I was in this small office in San Francisco and the bathroom stall was tiny. I can’t believe they did that.”
Years earlier, those two law firms had represented another client targeted by both Koppikar and Aurelius Value. That company was Bank of Internet USA, which has since been renamed Axos Bank. That short just happened to be the trade that introduced Koppikar to the clubby world of short sellers.
Short sellers typically have a cynical view of the world, but Koppikar — with a CV that includes the Wharton School, Stanford University, and Goldman Sachs — might seem an unlikely candidate to join what’s often self-described as an unruly group of misfits.
Koppikar was born in Australia, the only son of Indian immigrants. When he was in middle school, the family moved to Pleasanton, California, in the East Bay, where his dad worked for IBM, the company with which he had started his career in India. By Koppikar’s account, it was a normal middle-class life. Though Indian Americans were in the minority there at that time, he was raised Christian, not Hindu, which he suspects made integration easier. (His mother is part Portuguese.)
Two things stick out from the telling of Koppikar’s teenage years. “I always used to get in trouble when I was in high school for romanticizing the poor,” he says. “I listened to Rage Against the Machine,” a Los Angeles-based rock band known for its revolutionary political views. (Koppikar says it’s still his favorite band.)
But the young Koppikar also was a budding capitalist who liked trading stocks. “I moved to the U.S. when the dot-com bubble started to percolate,” he says. “I was one of those kids — back then it was E-Trade — sitting around trading these dot-com stocks and making, or maybe losing, money.”
Having caught the money bug, Koppikar then took the traditional route to Wall Street: He graduated from high school early, enrolled at Wharton, and when he graduated went to work at Goldman. He landed there between 2007 and 2009, working in the asset management arm focusing on private equity.
Working on Wall Street during the financial crisis was an eye-opening experience. The people most responsible for the collapse “not only did not get held accountable, they were bailed out and then they were promoted. They were promoted due to their incompetence,” Koppikar says.
“That shapes you,” he says.
His next stop was TPG, the big buyout firm, which had invested in a number of companies that went bankrupt around that time, including Harrah’s Entertainment, TXU, Neiman Marcus, and Washington Mutual.
Koppikar left TPG in 2011 to pursue an MBA at Stanford. After completing a summer internship at hedge fund Viking Global Investors and graduating from Stanford, he rejoined the private equity firm. This time, his job was shorting stocks for a new long-short hedge fund TPG had launched. Shorting is pretty much anathema to private equity — after all, private equity funds often end up buying the stocks short sellers have targeted. But Koppikar found he liked it and was good at it.
“The thing that stands out about Nate is he just hates when he finds one of these scams or companies that he thinks is preying on people,” says the person behind Aurelius Value, a small hedge fund manager who asked that his name be kept confidential.
He pointed to the Bank of Internet short they both worked on. The bank’s strategy, he explained, is to “go into these little banking niches that nobody else will. For example, they’ve got a business that buys structured settlements from disabled and mentally handicapped people, and they buy these things at discounts. The whole model is essentially taking advantage of the disabled.”
(While the Office of Inspector General investigated Axos, the Trump Justice Department decided not to prosecute.)
Back in 2014, when Koppikar first started to look at Bank of Internet, a friend put him in touch with Andrew Left, who then introduced Koppikar to Carruthers and Matagrano, who were also short the stock. “I found out about their world,” Koppikar says, referring to the group of short sellers who were living in the San Francisco Bay Area, which also included Kingsford Capital Management’s Mike Wilkins and former hedge fund manager Marc Cohodes. (Many of them attended Koppikar’s San Francisco wedding in 2018.)
“It was a bunch of older guys. And I thought what they did was totally awesome. They didn’t focus on numbers,” Koppikar says. On Wall Street, he says, “I’d have to come to a team meeting every day and talk about how in 2023, earnings will be $5.70 a share. And I multiply that by 20 times. And I’m like, this is complete bullshit.”
The short sellers had a totally different mindset. “They’d say, ‘We found these lawsuits and we had our PI dig this stuff up on this guy and he did this and he’s this kind of guy,’” says Koppikar. “I started spending all my time on the psychology of these CEOs, and they’re all sociopaths.”
Koppikar, who never considered himself a joiner, had found his tribe. “I like to be able to say what I feel,” he says. But he knows such independence of thought carries a heavy price: “It has cost me things in my career.”
Matagrano’s path wasn’t too dissimilar from that of Koppikar. The older Orso partner also grew up in the Bay Area and started out in investment banking — except he was at Goldman’s rival, Morgan Stanley, before moving into private equity and venture capital around the peak of the dot-com bubble in 2000. He then went to work at a small hedge fund and, like Koppikar, was tasked with finding stocks to short. His boss handed him a book on short selling, “Sold Short,” by Manuel P. Asensio, who in 1996 had published what is believed to be the first activist short report. “I remember reading the book, and I thought, ‘Man, this sounds way cooler than value investing,’” Matagrano says. Eventually, he landed at Kingsford Capital before joining Carruthers at Third Point.
But soon after the two men launched Sophos, the conventional dedicated short-selling model they followed seemed to stop working. “Locking yourself in your office and building models and doing 30 phone calls to competitors and [former employees] and doctors and stuff like that every week was effectively burying your head in the sand,” says one longtime short seller.
The nature of public markets was changing, as more assets were being managed in passive vehicles like exchange traded funds. Also, bigger hedge funds began gunning for the short sellers. The bigger funds had learned about the short squeezes the hard way. In September 2008, many hedge funds famously got squeezed in a big short of Volkswagen. In recent years, these funds have begun using the tactic against dedicated short sellers.
When Koppikar asked Matagrano to join him to start his new short-selling firm — naming it Orso, which means “bear” in Italian — he had a vision for doing things differently. While short sellers typically look at individual companies, taking a bottom-up approach to investing, Koppikar overlaid that strategy with his macro insights.
“If I had to reverse-engineer how he thinks about the world,” says Matagrano, “I would say he’s really good at understanding what the current narratives in the market are, and probing what the critical assumptions underlining those narratives are, and finding a soft spot in that assumption, and figuring out if it’s something that can be exploited — because if it turns, that’s going to inject all kinds of uncertainty.”
The tech crash is a good example. For years, short sellers and value investors had been comparing the bull market to the dot-com bubble — and kept saying that another bust was just around the corner. Being wrong cost them a ton of money.
What intrigued Koppikar were the similarities between Y2K and Covid-19. “The reason this became the dot-com thing is because Covid was Y2K. You had a massive spend,” he explains. “It was for hardware infrastructure and for software upgrades in Y2K. And this time it was for cybersecurity, work from home, remote, cloud.” But both Y2K and Covid-19 were temporary phenomena, and the bubbles eventually burst.
Koppikar has since covered some of his tech shorts that were last year’s star winners — including Covid-19 high-flyers DoorDash, Shopify, and Carvana. (He also covered Facebook.) Now shorts on financial companies, including asset managers like Blackstone, as well as banks, dominate Orso’s book.
Given his background, Koppikar already had an insider’s jaundiced view of private equity. But figuring out when — or how — to short private equity firms was not easy, given their ability to forestall pain through the long fund lockups and what AQR Capital Management’s Cliff Asness calls “volatility laundering,” the illiquidity and lack of transparency that obscures private equity’s risks.
It was Orso’s work on crossover hedge funds — the Tiger Cubs — that led Koppikar to Blackstone. Many of the same investors were in both, and the valuation problems were similar.
In a letter to investors last summer, Koppikar singled out Blackstone, though he did not name it. Instead, he called it Bad Mark Co., saying its REIT appeared to be a “levered house of cards” that he believed was headed for a fall.
“The parent for BMC trades as if it is one of the greatest businesses in the history of markets,” Koppikar wrote. “Our view is variant. We think the stock will see a significant correction in the coming months.” He was certainly right on that point: In 2022, Blackstone shares fell more than 40 percent — more than double the decline of the S&P 500. In this year’s market upturn, they’ve gained 21 percent, leaving the stock down more than 30 percent over the past year. (Orso is still short the stock.)
As Koppikar explains, “Blackstone was out buying real estate like some crazy yahoos all of ’21.” The firm had raised “a ton of money,” he says, “and then they just closed their eyes and pretended the real estate market hadn’t fallen off a cliff, and rates were clearly going up and they were not doing anything about it.”
Although the stock prices of publicly traded REITs were falling last year, Blackstone “just wouldn’t mark down its book,” Koppikar says.
In response to Koppikar’s criticism, the massive private equity firm says BREIT has a 12.3 percent annualized net return since inception six years ago, more than twice the return generated by the listed REITs in large part because its real estate is mostly located in the Sunbelt in sectors such as rental housing and logistics centers like warehouses: “These sectors continue to experience growth, which is key to the portfolio’s performance and to helping offset rising rates,” a Blackstone spokesman says. BREIT’s values are updated monthly to reflect the current environment, he adds.
Koppikar says he also looked at BREIT’s offering documents. Unlike investors in most private equity funds, BREIT investors can take their money out monthly. But buried in its prospectus were the terms of its gates. If a lot of investors wanted out at the same time, it was clear they could be out of luck. “We realized that this thing is basically locked up,” he says.
In January, when redemptions went above the monthly 2 percent fund-wide limit, Blackstone did manage to give BREIT investors 25 percent of what they’d requested.
Real estate issues aside, there are other signs of trouble in private equity as an industry that Koppikar has singled out. One is the growing popularity of continuation vehicles, which he argues involve “holding assets past the fund life by flipping it to a continuation vehicle with sweetheart economics for the private firm.”
And then there are the sponsor-to-sponsor flips — an “alarming volume of sales to other private equity firms, sometimes resulting in limited partners selling assets to themselves, a practice we regard as Ponzi-esque,” says Koppikar. (The demise of SPACs has made exits through the public markets almost impossible.)
At the same time, Koppikar argues that the upcoming recessionary impact will inevitably be less of a threat to the system because the private equity industry largely lends to itself. In this cycle, the risks will not fall on regulated banks. Instead, it’s the investors in private equity who will bear the brunt of any losses.
“Understanding the changes in the banking system is in our view the most important piece of forecasting where a Fed-induced hiking recession could take us,” he told investors last year.
The new environment can be traced to the financial crisis of 2008. When the banks were faced with insolvency at that time, the Federal Reserve engineered a way out to protect the banking system.
“The U.S. government was trying to facilitate the wind-down of Citibank’s bad debt, and Citibank’s bad debt was all of the private equity debt,” Koppikar explains. No one would buy the leveraged buyout loans, he says, so through the Troubled Assets Relief Program, the U.S. government lent private equity firms money to buy back their own debt, which gave birth to the private credit industry — what Koppikar calls the “shadow banking system.”
“I worked on it. I remember it,” he says.
Given private equity firms’ potential ability to massage the valuations and returns of their portfolios, their apparently strong performance has led institutional investors to continue investing in these funds, one after another, which has allowed assets to mushroom. Koppikar thinks it is strategic: “Private investment firms continue to hold assets at levels with no support whatsoever from public market comparable companies, often to justify raising subsequent fund vehicles.”
Blackstone says its money-raising machine hasn’t skipped a beat. The alternatives giant reports that last year was its second-best year for fundraising, with $226 billion raised, including the largest secondaries fund ever. And the firm says it is currently on track to close the largest real estate private drawdown fund in the world. But even Blackstone president Jon Gray acknowledged the “difficult private equity fundraising environment” in a call with investors late last year.
There is some evidence that the forward momentum is beginning to slow. “Institutional LPs are cash strapped right now because they made huge commitments to these funds and they have to hold money back for it,” says Koppikar. Last year’s market downturn added to their agony.
“What happens is money stops coming in,” he says, citing as evidence the fact that Blackstone has been having trouble raising what it hoped would be a record $30 billion for a new buyout fund, while other private equity firms have slowed their fundraising as well.
Predicts Koppikar: “It will be a slow bleed.”
