MO Altria Group Inc

Investors in highly valued e-cigarette maker undeterred by risks of regulation

By Juliet Chung 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 14, 2018).

Several large investment firms are sitting on windfalls from e-cigarette maker Juul Labs Inc. -- and plan to continue backing the controversial startup despite the risk of increased regulation.

Tiger Global Management LLC, Darsana Capital Partners LP, D1 Capital Partners LP, Marianas Fund Management LLC and Coatue Management LLC have invested in Juul at various points over the last two years. Juul has rapidly appreciated in value, rising to a roughly $16 billion valuation last summer.

A possible deal to sell a significant minority stake to Altria Group Inc., first reported by The Wall Street Journal, could value Juul at more than $30 billion, said people familiar with the matter. Coatue has approached its clients about investing in Juul at a roughly $30 billion valuation should the Altria deal fall through. A valuation above $30 billion would make Juul one of the world's most valuable startups, a remarkable ascent even by the fast pace of Silicon Valley.

The firms' bets on Juul -- described by more than a dozen people familiar with the investments -- hold both regulatory and reputational risks given e-cigarettes' use among youth. Some hedge-fund clients have privately expressed discomfort with the investment or opted out of having their money in Juul.

Other investors, including Viking Global Investors LP; Willett Advisors LLC, the family office of former New York City Mayor Michael Bloomberg; and Valiant Capital Management LP, have considered investing in Juul but passed for reasons including unease about its popularity among underage users, other people said.

The funds backing Juul are betting it can disrupt the $600 billion cigarette industry with its thumb drive-shaped vaporizer that delivers a powerful dose of nicotine from liquid-filled pods it also sells. Smokers want to quit, investors say, and Juul's vaping device offers the most satisfying alternative. Its business model is also attractive because its liquid nicotine enjoys higher margins than traditional cigarettes, which are subject to high taxes, but are still addictive.

Critics argue Juul, the dominant e-cigarette maker, is creating a new generation of nicotine addicts by introducing underage users to vaping. The company and its backers say the e-cigarettes are meant to help adult cigarette smokers switch to a less-harmful alternative.

One of the biggest winners on paper is $29 billion Tiger Global, which has been an early mover among hedge-fund firms into private investments. Tiger Global invested through its venture business in early 2017, when Juul was a product of vaping startup Pax Labs. The deal valued Pax around $300 million largely on the basis of Juul and was a way for Tiger Global to bet on Juul.

Tiger Global more recently led a fundraising round for Juul in July, when it invested $600 million.

New York stockpicking hedge funds D1 and Darsana also invested in July. The $5 billion D1, which started trading earlier this year as one of the biggest hedge fund launches in years, has also bet against tobacco stocks.

Marianas bought a stake in Pax when it was valued around $300 million. Marianas founder Will Snellings at one point described the wager to a potential investor as perhaps his greatest deal.

Mr. Snellings closed his hedge fund in 2017 but continues to manage a special-purpose vehicle holding Juul. Some of the investors who opted into the vehicle have been selling shares in it on the secondary market in recent months, buyers said.

But regulation remains a risk for investors.

The Food and Drug Administration launched a probe of Juul in April, requesting information that could help explain why its products appeal to minors. FDA Commissioner Scott Gottlieb said in September he was considering a ban on flavored e-cigarettes, declaring teen use an "epidemic." Federal data released in November showed a 78% jump in 2018 over the previous year in e-cigarette use among high-school students.

Juul said in November it would stop selling most of its flavored products at brick-and-mortar stores and shut down some social-media accounts, shortly before the FDA said it would restrict flavored e-cigarette sales. A company spokesman on Wednesday referred to a previous statement by CEO Kevin Burns: "Our intent was never to have youth use Juul products. But intent is not enough, the numbers are what matter, and the numbers tell us underage use of e-cigarette products is a problem. We must solve it."

Some investors said they hope Juul's actions will reduce youth vaping to a point where an FDA ban on e-cigarettes altogether will be unlikely. And while Juul has run into regulatory hurdles in Israel, investors expect significant growth overseas even if the company grows more slowly in the U.S.

Some hedge funds internally debated the investment given Juul's popularity among youth and quizzed the company about its plans to police sales before investing.

Wealthy individuals and families are also among Juul's investors, including hedge-fund billionaire Stanley Druckenmiller and Nicholas Pritzker, a Juul director.

Some institutions have found themselves in awkward positions.

San Francisco philanthropy Good Ventures, started by Facebook Inc. co-founder Dustin Moskowitz and his wife, philanthropist and former reporter Cari Tuna, opted out of investing in Juul through Darsana. Good Venture's mission is "to help humanity thrive," according to its website. Darsana gave its clients a choice about whether to invest in the company after learning several were uncomfortable backing it.

But Good Ventures is invested in Juul through Tiger Global, which uses committed capital to make private investments. "Good Ventures seeks to avoid committing to funds likely to make investments in industries that conflict with its mission," Michael Levine, a spokesman for Good Ventures, said in a statement.

Write to Juliet Chung at juliet.chung@wsj.com

(END) Dow Jones Newswires

December 14, 2018 02:47 ET (07:47 GMT)

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