Who’s Really Making the Call –

First Sequoia Capital, then Charles River Ventures. Just as they said they would, top-tier firms are rejecting money from public LPs, like pension funds and unversities (see story, page 16). There will be more to come. Why? The simple answer is that they can. With the trend toward smaller funds, GPs can afford to turn away money from the likes of the University of California and still have an oversubscribed fund.

The only problem with that explanation is that it doesn’t account for why Sequoia took public money to begin with in its latest fund. It let UC and the University of Michigan participate in its $395 million fund – even though it had enough demand to raise $1 billion – only to later kick both LPs out, citing disclosure concerns.

What explains the about face? Here’s my conspiracy theory: Because of the smaller fund sizes, many LPs aren’t getting as large a stake as they’d like, so they’re going back to GPs and saying, “Hey, we’ve been with you since day one. Why don’t you give us the share that you set aside for (insert name of public LP here)? Just tell them that you don’t have any choice in the matter.

Sequoia probably wanted to keep some of its longtime public LPs happy, just in case it might need to raise a huge fund in the future, but then it likely felt pressure from other LPs who were unhappy with their allocations. The disclosure issue gave it a lelgitimate excuse to kick out UC and Michigan. Likewise, CRV had three or more times as many LPs as it needed. And, like Sequoia, it said it felt bad that it had to cut out public LPs. “Sorry, guys. We’d love to have you on board, but our hands are tied.”

On the surface, it looks like the GPs are driving the decisions because they’re sending out the Dear John letters. But it appears that LPs are forcing their hand. For all the talk about GPs regaining a position of power as they raise smaller funds, it looks like the guys with the pocketbooks – LPS, in this case the private ones – have just as much influence as they have ever had.

-Lawrence Aragon