Can Sequoia get its spark back?

One thing to start: Saudi Arabian telecoms group STC is acquiring a nearly 10 per cent stake in Telefónica valued at €2.1bn, a move that marks the latest foray by state-owned Gulf telecoms companies into Europe.

In today’s newsletter: 

Sequoia’s bumpy year leaves investors at a crossroads

In just 12 months, Sequoia Capital has spun off its highly profitable Chinese arm, slashed its crypto fund in half after a bet on cryptocurrency exchange FTX went south and bid adieu to its long-serving partner and industry veteran Michael Moritz.

The most chaotic year in the venture capital firm’s 51-year history has prompted some investors to ask unprecedented questions of the firm and its direction under chief Roelof Botha, DD’s George Hammond reports.

“Who do they want to be; what’s their brand?” said the head of one Sequoia limited partner, a sovereign wealth fund, who’s weighing whether to reinvest in its next fundraising.

The firm that became one of the most dominant forces in tech investing with bets on Apple, Atari and Google — and has defended its title with more recent investments in Airbnb, Instagram and OpenAI — remains the gold standard, according to multiple LPs.

But mis-steps and misfortune have tested investors’ confidence. 

The firm’s $225mn investment in Sam Bankman-Fried’s collapsed crypto empire FTX in 2021 was a “humiliation [that] is unique in their history . . . an unmitigated disaster”, according to one of Sequoia’s longest-standing investors. 

Committing $800mn to back Elon Musk’s $44bn Twitter takeover last year also raised eyebrows among some LPs. Twitter, now rebranded X, is worth less than half its purchase price by Musk’s own estimate.

Botha has a clear message for the doubters: “Our goal is to be the top-performing investment partnership in the world, just as it always has been,” he told the FT.

The South African investor who has managed the US and European business since 2017 and stepped up to manage the global partnership last year has served as one of the chief architects behind the firm’s monumental divorce from China, India and south-east Asia — ending Silicon Valley’s most ambitious global project in the process.

While the Asia split, FTX and Musk dominated headlines, LPs say the most consequential of Botha’s changes is likely to be the introduction of the Sequoia Capital Fund in 2021, a vehicle to hold Sequoia-backed companies long after they go public. 

The fund was meant, in theory, to keep the firm close to the best companies, benefiting founders and LPs alike. 

But in the months after launching, the Sequoia Capital Fund was hit by the broader market downturn that led to a sharp fall in the price of tech stocks. 

“I didn’t predict the enormous crash but we knew there was a risk,” said one longstanding LP.

On a one-off trip to see more than 50 of Sequoia’s biggest limited partners this summer, Botha and top lieutenants Alfred Lin and Pat Grady framed the changes as part of a plan to capitalise on a boom in artificial intelligence and beat competitors such as Andreessen Horowitz to the best founders.

But Sequoia has yet to get all of its investors on board.

“These are radical changes,” said one of Sequoia’s longest-standing LPs. “It’s an absolutely enormous amount of change for an organisation and it’s too early to say if it will be successful.”

CVC puts down new roots ahead of its IPO

CVC’s prowess for buying and selling companies has made it one of the world’s best-regarded buyout firms. Now, the €161bn investor is using its dealmaking skills to expand its own business. 

On Tuesday, CVC agreed to pay €1bn in cash and shares for Dutch infrastructure investor DIF Capital Partners. The acquisition of the €16bn asset management firm gives CVC a foothold in an infrastructure market that has grown quicker than CVC’s home turf of leveraged buyouts.

“Within the private markets sector, it’s the area that has been growing most rapidly,” CVC’s managing partner Rob Lucas said in an interview with DD’s Will Louch and Lex’s Alan Livsey. 

Rivals of CVC including EQT, Brookfield and KKR have all rapidly scaled their infrastructure strategies in recent years, adding billions of dollars in fee-paying assets under management, a growth area CVC has missed out on in the past.

And by expanding its AUM, Lex notes, its valuation will be higher for its future listing.

The private equity firm is betting that higher interest rates will do little to dampen the returns infrastructure investors are able to generate, even as they cause a dealmaking slump across private markets. This is, at least in part, because money will flow into the energy transition.

“There are huge structural tailwinds,” Lucas said. “There is no doubt that everywhere you look there is a growing need for infrastructure.”

With the DIF deal, CVC is looking to replicate the model employed when it bought Glendower Capital, a firm focused on buying second-hand investor stakes in private equity funds. 

CVC’s acquisition will also allow DIF, a relatively niche player, the chance to tap into its new owner’s powerful investor base and resources. 

Despite the chance to join one of the buyout industry’s biggest moneymaking machines, some at DIF will take convincing. 

An internal email circulated among DIF employees acknowledged the exciting opportunity but noted there were likely to be “mixed feelings”. 

Investors cast doubt on Arm’s IPO valuation, again

When SoftBank bought a 25 per cent stake in Arm from its own Vision Fund less than a month ago, the Japanese conglomerate appeared to be targeting a valuation of $64bn for the chipmaker’s forthcoming initial public offering.

Convenient as it might’ve been for the $100bn Vision Fund’s deep-pocketed backers including Saudi Arabia’s Public Investment Fund, public investors studying the share offering weren’t sold on that figure given the UK-based chip designer’s fall in revenues last year.

Their scepticism appears to have been warranted: Arm noted in an updated filing on Tuesday that it’s targeting a valuation of up to $52bn — a noticeable peg down from SoftBank’s recent purchase.

Arm’s much-awaited IPO will be priced between $47 and $51 a share, raising up to $4.9bn for SoftBank with investors including Apple, Google, Nvidia, Samsung, Intel and TSMC planning to purchase up to $735mn worth of shares. 

Investors are still sceptical over the latest valuation, however.

“I don’t find it compelling,” one prominent investor who looked at the Arm IPO and doesn’t plan to invest in it told the FT. “Even if you’re optimistic, the valuation doesn’t make a lot of sense. It’s hard to get above a mid-$40bn valuation.”

“They were convincing enough to show it was worth more than $35bn, but not higher than $40bn,” said another.

Investors have pointed to concerns including the chipmaker’s exposure to China and its struggle to make inroads in artificial intelligence, as DD has written.

The Arm IPO may not be the panacea that SoftBank founder Masayoshi Son had hoped for.

Job moves

• The European Commission has appointed Belgium’s Didier Reynders as the EU’s competition chief, while incumbent commissioner Margrethe Vestager takes a leave of absence to run for the top job at the European Investment Bank.

• Illumina has named Jacob Thaysen as its new chief executive, as the biotech group seeks to rebuild its leadership team following a bruising battle with activist investor Carl Icahn.

• TPG has named partner and chief human resources officer Anilu Vazquez-Ubarri as chief operating officer of the firm, succeeding Ken Murphy, who plans to retire.

• Morgan Stanley’s former operating chief Jonathan Pruzan, who was a leading contender to eventually succeed CEO James Gorman before leaving the bank in January, has joined credit investment firm Pretium as president.

• Barclays has named Morgan Stanley’s Pedro Costa as Americas vice-chair of technology, media and telecommunications M&A, based in New York.

• Alan Joyce is to step down early as CEO of Qantas.

• Morgan Stanley veteran Seth Bergstein has joined Evercore’s technology investment banking business as a senior managing director, based in New York. 

• Rio Tinto has named former General Electric chief Jérôme Pécresse to lead its aluminium business, succeeding Ivan Vella.

• Bregal Investments has appointed the Canada Pension Plan Investment Board’s former private equity head Delaney Brown as its first head of capital solutions, based in London.

Smart reads

Tax-receivable tiff Court cases allege that private equity giants used obscure tax deals to enrich executives at shareholders’ expense, The Wall Street Journal reports.

Bigger than Goldman Abu Dhabi’s Sheikh Tahnoon has leveraged bottomless reserves of oil cash and powerful connections to become one of the world’s most influential dealmakers, Bloomberg writes.

‘Excess purchase price’ UBS wasn’t the only one to pull off the “deal of the century”. DD’s Sujeet Indap breaks down the $44bn bank bailout bonanza in this Alphaville post.

News round-up

Enbridge in $14bn deal for Dominion gas utilities as US energy mix shifts (FT)

Ontario Teachers’ fund acquires UK wealth manager 7IM (FT)

Chinese developer Country Garden avoids default on dollar bonds (FT)

Renault chief moots €10bn valuation for EV unit to be floated next year (FT)

Warner Music takes majority stake in label run by son of top rival (FT)

Vedanta to take back ownership of Zambian copper mine (FT)