Sequoia borrows Wall Street’s playbook in chase for ‘permanent capital’

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Sequoia Capital became one of the most successful venture capital firms in Silicon Valley with early bets on Apple, Google and WhatsApp. Now it is borrowing a playbook from Wall Street to grow even bigger.

Last week Sequoia said it would rip up the formula used by venture capital firms for decades, in which investors park their money in funds, typically for about 10 years, before being paid out.

Instead, Sequoia will create a “permanent structure” to house investor capital, which will then channel money into its sub-funds.

The move will incur extra fees for investors, but give Sequoia the flexibility to hold stakes in tech companies and reap the rewards for much longer. Investments, said Sequoia, would no longer have “expiration dates”.

The plan mirrors the “permanent capital” formula that asset managers including Blackstone and hedge funds such as Pershing Square started applying several years ago.

These open-ended funds, designed to grow assets without the pressures of constant fundraising, have helped buyout firms become sprawling asset managers doing everything from lending to biotech investing.

In the middle of a historic tech boom, Sequoia and its biggest competitors were now jostling to become dominant firms that rivalled Wall Street outfits in size and influence, investors said.

“One of the questions we ask companies is, ‘What’s the scale of your ambition?’ I think we have to apply that to ourselves,” said Roelof Botha, a partner at Sequoia and head of the firm’s US and European business.

Botha said the new “Sequoia Fund” could manage $10bn to $20bn by the end of next year, and some investors had asked if they could invest additional money in it. A separate Sequoia stockpicking hedge fund also manages about $12bn in assets, according to its website.

The move, which will not involve Sequoia’s separate businesses in India and China, came at a moment when the firm’s privileged position in venture capital appeared stronger than ever.

In the past month, Sequoia’s venture funds managed $45bn in public stock holdings that had been purchased as private shares for $2bn. They also hold sizeable stakes in some of the largest private companies nearing listings, such as the fintech groups Klarna and Stripe.

The most recent Sequoia Global Growth Fund, an $8bn vehicle that invests in start-ups nearing big acquisitions or public listings, has more than doubled its invested capital since 2018, according to disclosures by the University of California system.

Investors in Sequoia said the restructuring would allow the firm to amass a large, stable base of assets that could be used to expand into new investing strategies.

Some other tech investors have sought similar arrangements. Greenoaks, a San Francisco-based venture firm, has raised about $1bn this year for a Guernsey holding company that makes investments in large private internet companies, according to one person familiar with the set-up.

Greenoaks planned to take the vehicle public in the next few years, and it would hold investments for longer than traditional venture funds, the person said. The firm declined to comment on the plans.

Other firms have considered imitating the more than $14bn Sequoia Heritage business, which manages diversified investments for endowments and other institutions. Andreessen Horowitz, which oversees $19.2bn in venture funds, recently explored starting a similar investing arm, said two people briefed on the plans. Andreessen declined to comment.

“Given the war chest of dry powder accumulated by venture funds in the last two years alone, it is no surprise that the more established players are moving more and more into the direction of asset accumulators,” said Claudia Zeisberger, a professor at France’s Insead business school.

Meanwhile, buyout groups have pushed deeper into private tech investments in recent years. Blackstone raised $4.5bn in March for its first growth equity fund, which has backed the matchmaking app Bumble.

Sequoia said the change would allow it to hold on to profitable investments in perpetuity, instead of selling when companies go public, citing companies such as the payments group Square that have continued paying dividends in public markets.

“The vast majority of the performance in these IPOs is typically 12 months out,” said Logan Allin, founder of the fintech firm Fin Venture Capital. “It’s not three to six months out.”

Sequoia’s restructuring followed a huge rush of later-stage venture investing from the likes of Tiger Global Management and Japan’s SoftBank. Traditional venture capitalists such as Sequoia aim to invest earlier in a start-up’s lifecycle and produce higher returns on their capital. The differences have recently created tensions as firms battle to gain larger stakes in fast-growing tech companies.

“You can’t do this strategy if your investment pace is torrid and your multiples are low,” said Botha.

Botha said the new fund could manage $10bn to $20bn by the end of next year © Getty Images

While Sequoia had considered similar restructurings before, Botha and other Sequoia partners revived the discussions in January this year, following the IPOs of Airbnb and DoorDash. They began reaching out to select investors in April to discuss the changes and have met with lawyers weekly to thrash out details.

Botha and two other Sequoia partners, Alfred Lin and Pat Grady, would manage the Sequoia Fund, said one person briefed on the set-up.

Unlike some other permanent fund structures, the Sequoia Fund may still come under pressure if market conditions sour.

Investors in the fund would be able to redeem from its public stock holdings twice a year following an initial two-year lock-up period, said people briefed on the terms. However, redeeming investors risked losing their desired share in Sequoia’s lucrative venture funds, the people said.

The Sequoia Fund will also add extra management fees of under 1 per cent to the costs already charged by Sequoia’s venture funds. Investors will pay additional performance fees if the fund beats a market-based benchmark.

Many large private capital firms such as Blackstone have become public companies, leading to big payouts for their partners.

The same outcome does not appear to be in Sequoia’s future. Sequoia is “organised in such a way that it cannot be taken public in order to enrich one generation”, Michael Moritz, a partner, wrote in a book about its late founder Don Valentine that was distributed to employees and associates of the firm last year.

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