Will public pensions go for Sequoia’s mega-fund? Firm needs big LPs it once shunned

Sequoia Capital, one of the most sought-after venture firms in the market, set its ambitions high by targeting between $6 billion and $8 billion for a global growth mega-fund. But to achieve its lofty goals, it will have to work with a section of the limited partner community it has shunned for many years: public pensions.

The firm once asked two of its public LPs — endowments for the University of California and University of Michigan — to leave its vintage 2000 Sequoia Capital X and sell their interests in older funds. This came after lawsuits prompted public institutions to start publicly publishing fund-return information in response to open records requests.

“Unfortunately, times have changed and the quiet curtain of privacy that protected our confidential information has been torn … We also have the right to protect our other clients, our portfolio companies and our sales from the various damages that can result from the dissemination of information that we consider highly confidential,” Sequoia Partner Mike Moritz wrote in a letter to the CIO of the University of Michigan endowment at the time.

While the University of California and Michigan continue to be investors in various Sequoia funds, it is believed that Sequoia allowed them to participate because both agreed to limit disclosure about the funds. It is not clear if Sequoia has ever had any public pension investors. A review of five of the largest pensions in the country — funds in Florida, California, New York — shows Sequoia in none of those portfolios.

It is unlikely that Sequoia’s new fund will be able to rely on its traditional investor base. The fund has a minimum commitment size of $250 million (at least for now), one LP said, and very few pools of capital around the world have the ability to make that kind of pledge.

Institutional investors that would be able to make such commitments include sovereign funds, ultra high-net-worth individuals, a few of the largest endowments and U.S. public pension funds.

Softbank, which raised at least $93 billion for the largest private equity fund in the market, targeted sovereign funds as well as reportedly corporations like AppleQualcommFoxconn and Softbank. It’s not clear if Sequoia has access to those companies as investors.

To help with outreach to the public pension world, Sequoia has enlisted the help of at least one partner. Silicon Valley Bank is shopping a special vehicle that will commit up to $1 billion to the Sequoia fund, sources said. Spokeswomen with Silicon Valley Bank did not respond to requests for comment.

A spokeswoman for Sequoia declined to comment.

“They’re kind of testing the waters [with public pensions],” an LP said.

Sequoia is raising the large global fund to have the capital to invest with a company through various growth stages while maintaining its ownership stake, sources said. “If they buy 20 percent of a seed company for a couple million dollars and that turns into Uber and they want to maintain that 20 percent ownership at every round, they want to have deep pockets,” a second LP said.

The challenge for Sequoia will be working through transparency issues that come with public pension investors, which, like other public institutions, are subject to open records laws. The second LP said the firm is in discussions with public LPs about those transparency issues.

“If you’re a public pension plan, you have to disclose all kinds of stuff, jump through hoops, that’s why they don’t go through pension plans,” the first LP said.

Action Item: Check out coverage of disclosure issues: http://bit.ly/2EujEND

Photo: Roelof Botha of Sequoia Capital speaks during Reuters Global Technology Summit in San Francisco, June 18, 2013. REUTERS/Stephen Lam