Sequoia Capital creates evergreen fund to hold public stocks

Sequoia Capital’s The Sequoia Fund will take the venture firm, one of Silicon Valley’s oldest and most successful, further into the post-IPO lives of its portfolio companies.

Now, instead of distributing shares to limited partners after portfolio companies go public, Sequoia will let its investors roll over their shares into the new evergreen fund and keep them under the firm’s management. Several of Sequoia’s portfolio companies held initial public offerings this year, including Robinhood Markets, Inc. and UiPath Inc.

Traditional venture funds force managers to sell holdings when 10- to 12-year terms expire. The new structure will let Sequoia keep its public-stock holdings indefinitely. The firm said it has about $45 billion in public stock of companies it backed when they were private.

“We’ve helped the company become successful, why should that relationship end? It seems unnatural,” said Roelof Botha, a Sequoia partner who leads its U.S. and European business.

He noted Sequoia held shares of Square, for example, for several years after its IPO but eventually was forced to sell. If it had held on, the firm would have made a much greater return. Mr. Botha is on Square’s board.

“We like Sequoia’s new recipe—as it fits nicely into our approach of investing,” said Thomas Birch, global managing director of venture capital for Caisse de dépôt et placement du Québec, a limited partner in Sequoia’s funds.

Mr. Birch said Caisse, which manages investments for pension funds in the Canadian province, also prefers to invest in companies from early stages to post-IPO stages to capture longer term returns.

The new structure will only apply to Sequoia’s U.S. and European operations, and not affect its China and India strategies, and a separate team will be hired to help manage the firm’s public holdings, Mr. Botha said.

The Sequoia Fund’s fees will be similar to those of long-only hedge funds and will only apply to the liquid portion of its holdings, while the underlying venture-fund fee structure would remain standard, he added.

Eventually the new fund will be the only source of capital for Sequoia’s future venture funds and startup investing. LPs would funnel capital into Sequoia’s funds solely through the new fund and may never have to give the firm more capital for venture deals, depending on how much distributed capital they keep under the firm’s management, Mr. Botha said.

“The expectation is that the fund would have enough capital to satisfy our future investments, possibly indefinitely,” Mr. Botha said.

Sequoia’s new structure dovetails with the blurring of public and private technology investing. Venture firms used to fund startups from idea to IPO, and then mutual and hedge funds would take over. That handoff is no longer so clear-cut.

Many mutual and hedge funds have created private investment strategies to buy into tech startups before they go public. At the same time, venture and private-equity firms have been trying to extend their investment cycles and sometimes moving further into public markets by sponsoring special-purpose acquisition vehicles.

“This move is very consistent with the emphasis on longer-term investments we are seeing across private capital,” said Josh Lerner, a Harvard Business School professor. “In principle, freeing investors from the tyranny of a forced sale of a business before its time is a very positive development. At the same time, the strategy poses many tricky implementation issues that may deter some other groups in emulating it.”

After a two-year lockup, LPs in The Sequoia Fund could redeem their holdings twice a year, similar to how hedge funds operate. That could potentially give them more control over when they get liquidity, said Jay R. Ritter, a professor at the Department of Finance at the University of Florida.

Mr. Ritter said the traditional venture-fund structure incentivizes managers to sell holdings to make a return, rather than collect fund fees indefinitely. When venture-fund managers leave public company boards they have more time to focus on new startup investments, he added.

“Looks like Sequoia has said that just because this is the way it was always done doesn’t mean it’s optimal to be doing that in today’s environment,” Mr. Ritter said, adding “there might be very valid reasons why this makes it more attractive to LPs.”

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