TheChek News Flow

Contrarians might have passed over China, but the point of being a contrarian is to venture to places others shun

Given the endless bad news about China’s economy, the contrarian in me wants to be bullish.

It’s true that debt, housing, local government and consumer demand are all a mess, and dire demographics raise the prospect of a Japanese-style economic disaster. But there are three things working in China’s favor as an investment destination: Stocks rarely have been this cheap compared with the U.S.; its entire weight in a global benchmark is smaller than Apple’s; and a weaker dollar might help.

The basic case is that China is cheap. MSCI China, which includes Hong Kong stocks, trades at just 10.8 times the next 12 months’ earnings, about half the 20 times earnings of both the S&P 500 and MSCI USA. Even that hides the cheapness of much of the market, as Tencent Holdings makes up more than 12% of the index, and trades at 17.5 times forward earnings.

Of course, China is cheap for a reason. The property-market implosion has exposed the underlying weakness of the economy, while frigid relations with the U.S. have scared off Western investors. The risk of being in a Communist dictatorship has become all too clear, with the arbitrary decision to shut the private education industry, the crackdown on China’s big tech companies and the capricious response to Covid-19.

The question is: How cheap should China be? Past evidence suggests it can get much cheaper in a crisis. In the 2008-09 financial crisis, China traded at 6.6 times forward earnings, and was below 10 for most of the time from 2011 to 2015. It is also one of the few countries whose history includes a thriving stock market that went to zero, after the Communist revolution in 1949.

Yet, China is remarkably cheap compared with the U.S. The gap between the U.S. and China valuations has only been this wide briefly in 2020 and 2021, according to MSCI data starting in 2003.

It isn’t only that China is cheap. As an emerging market, it ought to benefit if the dollar begins to weaken. Aside from anything else, a weaker dollar would help China defend the yuan, as it has been trying to do.

“There’s a strong case to be made that the dollar has peaked and already started to decline,” argues Gustavo Medeiros, head of research at Ashmore Group. “When the dollar weakens, it typically becomes a virtuous circle of inflows and lending” to emerging markets.

Certainly, the dollar became historically strong. It peaked in trade-weighted terms, adjusted for inflation, last October at its strongest level since the 1980s. It has since weakened about 6% as the Federal Reserve moved from aggressive rate increases to a more balanced approach, and inflation in much of the developed world became a bigger problem than in the U.S.

I prefer investments to be cheap in absolute terms, not merely relative to alternatives. And the bull case applies to other investments, too. The U.S. market is very expensive, and makes everywhere else look cheap by comparison—with the U.K. at about 10 times forward earnings.

But the prospect of a weaker dollar wouldn’t particularly help other developed markets, except in pure currency gain terms. Emerging markets, however, usually benefit much more when the dollar falls. Compared with the rest of the emerging-market universe, China is about as cheap as it has ever been.

Some investors might still balk at the political and geopolitical risks of China, particularly regarding Taiwan. That’s perfectly reasonable. But there’s a contradiction here. Apple gets a fifth of its sales from China, has a large manufacturing base in the country and is bigger in the MSCI All Country World Index global benchmark than China.

Investors choosing to steer clear of China because of the political risks at least ought to worry about Apple, the world’s most-valuable company and a very expensive one, at 29 times forward earnings.

Contrarians looking for ways to avoid the richly priced U.S. market might have passed over China because of the constant flow of bad news. But the point of being a contrarian is to venture to places that others shun; it has plenty of risks, but they are at least starting to be priced in. I would prefer it to be cheaper still before buying, but who wouldn’t?

The property giant paid $22.5 million in coupons to international bondholders just before the end of a 30-day grace period

Embattled Chinese property giant Country Garden Holdings 2007 -0.98%decrease; red down pointing triangle made two overdue bond-coupon payments shortly before the end of a 30-day grace period, averting an international debt default that many investors saw as inevitable.

The 31-year-old developer on Tuesday made interest payments totaling $22.5 million on U.S. dollar bonds with a combined face value of $1 billion, according to a person familiar with the matter. The coupon payments were originally due in early August.

The financial struggles of Country Garden, which has been China’s top surviving developer after dozens of its peers defaulted on their debt, have rattled the country’s beleaguered housing sector and financial markets. The company’s cash crunch is a direct result of declining new home sales, which stem from weak consumer confidence and potential home buyers’ worries about the direction of home prices while China’s economy sputters.

In August, new home sales at China’s largest developers fell a third from the same month a year ago. Country Garden experienced a steeper drop in its monthly contracted sales, which declined by more than 70% to the equivalent of $1.1 billion in August.

Investors are still highly pessimistic about the Foshan-based company’s ability to withstand the downward spiral in China’s housing market and continue paying off its debt. As of June 30, Country Garden had the equivalent of $15 billion in bonds, bank loans and other debt coming due within a year.

The two Country Garden bonds that received their coupon payments have been trading at deeply distressed levels that indicate a very high probability of default. They were bid at around 10 cents on the dollar on Tuesday, according to Tradeweb.

The developer had signaled in recent days that it was likely to make the overdue dollar-bond payments. Late last week, Country Garden won approval from creditors in mainland China to extend the maturity date of $537 million in yuan-denominated bonds by three years. It also made an interest payment of around $600,000 on a bond denominated in Malaysian ringgit on Monday.

The company also plans to extend the maturities of seven more domestic bonds, according to the person familiar with the matter.

Country Garden and its subsidiaries have roughly $10 billion of U.S. dollar bonds outstanding, according to data compiled by YY Rating, an independent Chinese credit-research firm. The company also has international bonds in other currencies, including the Thai baht and Hong Kong dollar.

Country Garden has two more dollar-bond coupon payments totaling $55 million in September. It has a $1 billion note due in January next year. It also has a 400 million Thai baht, the equivalent of about $11 million, note maturing late next month.

Around two years ago, property giant China Evergrande Group also missed some dollar-bond interest payments and made them before their grace periods expired. By late 2021, Evergrande, the world’s most indebted developer, was unable to keep up with its payments and finally defaulted on its dollar bonds. The company reached a debt-restructuring deal with its international bondholders earlier this year after protracted negotiations with creditors.

Chinese authorities are trying to do more to revive housing demand after largely standing by for much of the past two years while dozens of property developers slid into distress. In recent weeks, regulators have made it easier for Chinese citizens to buy properties by loosening the definition of first-time home buyers and lowering minimum down-payment ratios on people’s first and second home purchases.

LONDON, Sept 5 (Reuters Breakingviews) - The semiconductor industry has changed immeasurably since Japanese conglomerate SoftBank Group (9984.T) bought Arm for $32 billion in 2016. Yet the British chip designer’s fair value may be in that same ballpark, according to a Breakingviews valuation.

SoftBank is seeking an equity value of $50 billion to $54 billion as part of the roadshow for Arm’s initial public offering, Reuters reported at the weekend. When the Japanese conglomerate’s boss Masayoshi Son scooped up the Cambridge-based company seven years ago, he was placing a bet on the so-called Internet of Things, the view that tiny semiconductors would proliferate across everyday household items and provide the next leg of growth for chip designers. Now he’s pitching it instead as a central player in artificial intelligence, the new industry vogue.

Stock-market AI darling Nvidia (NVDA.O) at first glance seems to validate Son’s valuation hopes. The Californian chip designer’s enterprise value has recently soared to $1.2 trillion, or 23 times analysts’ average forecasts for its revenue this year, LSEG data shows. On that basis, Arm’s top line could stagnate at $2.7 billion and still justify a greater than $60 billion equity value, after including its $2 billion of net cash.

But that misunderstands Nvidia’s ascent, which is underpinned by massive increases in forecasts for operating profit. The mean analyst prediction for earnings before interest and taxation in the financial year to January 2026 has more than doubled since the start of May. The lesson for SoftBank and Arm is clear: chip investors are laser-focused on medium-term operating profit, not just revenue.

There are three key moving parts to Arm’s valuation. First is its top-line growth, which has been lumpy, dropping 1% in the last fiscal year but leaping 33% in the preceding 12 months. SoftBank in a recent earnings presentation highlighted a longer-term trend: Arm’s 14% compound annual growth rate over the past three years, using fiscal first-quarter figures. Apply that pace of expansion to the most recent calendar year, which makes it easier to compare Arm to listed peers, and the company’s revenue would reach $4 billion in 2025.

Second is the operating margin, or the percentage of sales that’s left over after deducting all costs other than interest and taxes. Under SoftBank, Arm’s operating margin has dropped to around 25%, from roughly 40% in 2015 – a consequence of Son’s preference for heavy investments in research. Bernstein analysts reckon a publicly listed Arm might nudge the margin back up to 33% within three years, if it lets costs grow slightly slower than revenue. On that basis, the company would pump out $1.3 billion of operating profit in 2025.

Third is the valuation multiple, which is best judged by looking at what investors are prepared to pay for similar listed companies. Nvidia, Cadence Design Systems (CDNS.O) and Synopsys (SNPS.O) are good choices. The first is exposed to Son’s beloved AI trend, while the latter two U.S. firms make software for chip designers, much like Arm, which licenses intellectual property for processors. On average, the trio have a current enterprise value of 25 times the operating profit analysts reckon they’ll earn in 2025, using LSEG data.

If Arm nabbed the same multiple, its enterprise value would be $33 billion, using the above growth and operating margin. Add the SoftBank-owned company’s net cash as of June 30, and the market capitalisation would be $35 billion.

Son last month agreed to pay a significantly higher valuation of $64 billion when SoftBank bought 25% of Arm from the Saudi Arabia-backed Vision Fund. In that context, the new $50 billion to $54 billion target would already represent an embarrassing step down. But even to justify the lower valuation, investors would have to torture the assumptions.

Start with revenue. AI star Nvidia’s top line will grow at a compound annual rate of 51% from 2022 to 2025, according to average analyst forecasts gathered by LSEG. Assume that Arm captures some of the same gold dust and grows at a 20% annual clip up to 2025. Holding other assumptions constant, Arm’s fair value would rise to $41 billion. It’s hard to see a case for raising the valuation multiple beyond 25 times, which is already much higher than the average 22 times multiple that Arm managed in its final three years as a public company before SoftBank swooped. So profitability has to do the final lift. To clear a $50 billion equity value the 2025 operating margin would have to surpass pre-SoftBank levels of around 40%, while revenue grows at 20% a year.

That’s an implausible scenario. To mimic and sustain Nvidia-esque growth, Arm CEO Rene Haas would have to keep ramping up investments in engineers and sales teams, which would weigh on margins. On the other hand, boosting profitability by reining back spending would probably make a turbocharged top line impossible. Arm can either have a rapidly rising top line or rapidly rising margins, but probably not both.

The company itself acknowledged this tradeoff in a 2021 filing making the case for its sale to Nvidia, which was blocked by antitrust authorities. “The capital markets would expect Arm to make significant strategic changes, including cutting costs…” the parties said, referring to the possibility of an IPO, concluding that the UK group faced “significant challenges to growth” as a standalone company. SoftBank’s hoped-for price range only works if investors are willing to believe two mutually contradictory things at once. That may be possible for a short while, especially if the stock market’s AI hype persists, but it’s hardly the basis for a stable valuation over time.

Ministers urged to ‘regain momentum’ after Britain sinks from fourth place to eighth

The UK has fallen behind other leading economies in supporting the development of a low-carbon hydrogen industry, two trade bodies have warned.

The Energy Networks Association and Hydrogen UK urged the government to “regain the momentum” after falling from second place two years ago, behind only South Korea, to eighth.

“Though some progress has been made, the USA, Germany, Japan, Canada, the Netherlands and France have all leapfrogged the UK, at a time when competition to attract international investment in energy infrastructure has dramatically increased,” they said. South Korea had retained its top spot, the report found.

A joint report by the two trade bodies compared policies to develop clean hydrogen in the UK to those in 16 countries including India and Saudi Arabia.

No significant low-carbon hydrogen production projects in the UK have yet reached a final investment decision, the study said, despite the government setting a target of 10 gigawatts of production capacity by 2030.

The findings follow another study by Energy UK, the energy industry trade group, last month that highlighted the “low levels of expected investment in the UK” as other countries, such as the US, boost incentives for clean energy investors.

In June, the Climate Change Committee, the government’s independent adviser, said the UK was making “worryingly slow” progress and had “lost its global leadership” on the road to reach its stated goal of net zero by 2050.

The warnings come amid a growing debate in the ruling Conservative party about its commitment to green policies in the run-up to the next general election, which is expected next year.

Opinion polls show Tory voters are particularly resistant to the idea that carbon-cutting policies should be pursued if they result in extra costs to households. Last week, Sunak promoted Claire Countinho, one his closest allies, to the role of energy secretary.

Hydrogen does not produce carbon dioxide emissions when burnt, so it is hoped it can replace fossil fuels in several areas, such as heavy industry, although how widely it will be used is debated.

Most hydrogen globally is currently produced from natural gas, releasing carbon dioxide in the process. Producing low-carbon hydrogen involves either capturing these emissions, or using water as the source and extracting the hydrogen via electrolysis powered by clean electricity.

Both of those processes are expensive and complex, requiring government support and planning to get up and running at scale.

The joint report looked at metrics such as financial support for producers, and the development of infrastructure to transport and store hydrogen. It highlighted tax credits of up to $3 per kilogramme available for clean hydrogen producers in the US, one of the measures introduced by president Joe Biden’s Inflation Reduction Act.

“The certainty and simplicity of this funding mechanism is in stark contrast to the UK’s heavily negotiated contracts, competitions and allocation rounds,” it said.

However, the findings contrast with a report by Cornwall Insight, the energy consultancy, in April. It ranked 14 countries on their potential to “develop low-carbon advanced hydrogen economies” and put the UK third. It highlighted “substantial advancement” in the UK’s plans over the year.

The government said in statement it was “committed to boosting hydrogen as an important step towards reaching our net zero goals”. New measures in the energy bill, which is going through parliament, would “provide investors with the confidence to invest in the hydrogen sector, with the potential to create over 12,000 new jobs by 2030,” it added.

Tenants in the UK capital face surging rents and eviction as landlords pass on pressure from higher borrowing costs

When Alexandra Rodriguez asked her landlord to repair the fire alarm in her rented flat in south London, she did not expect his response to be an eviction notice. Yet he sent her a formal request to vacate the flat within two months — then re-advertised it at a rent nearly 40 per cent higher.

“They advertised the property on Rightmove at £1,800 per month . . . that’s why they got rid of us,” said the 37-year-old science technician, adding that she was still “emotionally and financially” recovering from being pushed out of her home.

Her experience echoes that of many Londoners who are being hit with surging rents or even evicted as landlords pass on pressure from higher interest rates. The private rented sector — on which the UK capital has become increasingly reliant over the past two decades — is particularly vulnerable to higher rates because of the prevalence of interest-only buy-to-let mortgages, which helped create legions of middle-class landlords.

Rents in London are at their highest level on record, far above those in the rest of the UK and higher than in many European capitals. London rents rose by a fifth between March 2020 and May 2023, with the median cost of a studio in Greater London reaching £1,275 per month, according to property agents Savills.

A boom in demand for tenancies is being fuelled by record immigration to the UK and a wave of students pushed into private rentals by a shortage of student accommodation, say experts.

Higher mortgage rates and the end of a government scheme supporting first-time buyers have meanwhile forced more would-be homebuyers into lettings, said Richard Donnell, head of research at Zoopla.

“The affordability of home ownership in London, where you need to be on a £100,000 income and [have] a £140,000 deposit to buy, means a lot of people are having to rent,” said Donnell. UK house sales are on track for their slowest year in more than a decade, according to Zoopla.

Soaring demand means tenants are competing fiercely for homes. Neil Short, head of London lettings at estate agent JLL, said they were entering bidding wars and offering to pay multiple months’ worth of rent upfront.

“I’ve been doing lettings for the best part of 20 years and only recently have I seen an instance where we’ve had to take a property off the market because within half an hour we generated viewings of 20 people,” said Short. “We were inundated with inquiries. We had to physically stop [them].”

Adding to the pressure, the stock of available homes to rent in London — already insufficient to meet demand — is at risk of shrinking after just starting to recover from a five-year low in 2022. About 4.8mn private landlords provide accommodation for a fifth of UK households, said Savills. Of those, more than 1mn are in Greater London, where they accommodate about 30 per cent of households.

Britain’s private rented sector boomed in the 2000s after the rollout of buy-to-let mortgages. London’s high reliance on interest-only loans has made it vulnerable to rising borrowing costs, which are putting landlords’ business models under strain.

The average two-year buy-to-let residential mortgage rate in the UK rose from 4.5 per cent in August 2022 to 6.6 per cent at the end of August 2023, according to Moneyfacts. That has hurt landlords within and outside London. Neil France, an Essex-based landlord with four buy-to-let properties, said the rises in monthly payments had been “horrific” and forced him to increase rents to avoid making a loss. “We have had to go out to all the families, sit down with all the tenants [and] explain to them the situation,” he said.

The hit to borrowers follows regulatory changes that had already dimmed the appeal of private rental investments. The UK government scrapped tax relief on buy-to-let mortgage interest in 2016, while landlords face the possibility of new energy efficiency requirements in the coming years, along with tougher regulation of the rental market.

“The impact of [the 2016 tax change] is really starting to be felt today, when you’ve got rates of 6 to 7 per cent that can’t be offset as an expense,” said David Fell, analyst at estate agent Hamptons.

Lenders repossessed 440 buy-to-let properties in the UK in the second quarter of 2023, up 7 per cent from the previous quarter, while a further 1,870 landlords were behind on repayments by a sum totalling more than 10 per cent of their outstanding loan, according to UK Finance.

“I cannot believe anybody would go into buy-to-let now,” said France. “I would question their sanity.”

Outstanding buy-to-let mortgages have fallen this year as landlords pay off their debt or sell properties to avoid the blow from higher rates. In London, high mortgage costs make the returns on such properties lower than elsewhere. “Unfortunately, we are going to see a lot of old landlords selling up,” said Donnell.

Hamptons estimates that between one-third and half of homes sold by landlords remain in the private rented market. A sell-off therefore risks further squeezing supply, experts warn. That would pile pressure on to London’s most vulnerable tenants, many of whom rely on private rentals because they cannot access social housing.

About a quarter of UK tenants in the private rental sector receive government housing benefit, according to analysis of government data by Zoopla and the homelessness charity Crisis — the figure in London is 29 per cent.

“We haven’t built enough social housing over the last 20 years, so the private sector growth has absorbed unmet demand,” said Zoopla’s Donnell. “As soon as the rental market stops growing, it highlights a whole lot of problems.”

Within London, the proportion of households in social housing — homes provided by councils and not-for-profit housing associations at rents linked to incomes — varies widely by borough, from less than 10 per cent in Redbridge to almost 40 per cent in Barking and Dagenham.

Local housing allowances have not kept up with rising rents, so people on benefits cannot compete in the private rental market, said campaign group Generation Rent.

They also risk having to find new homes because landlords in England can evict tenants with two months’ warning without explanation from as little as six months into their tenancy.

Such evictions will be restricted under a renter’s reform bill that is going through parliament but the tougher rules have made slow progress since they were pledged in 2019. Generation Rent said loose regulation made low-income families especially vulnerable.

Rents are rising throughout London but are growing fastest on the city’s outskirts in boroughs such as Harrow, Sutton and Havering. “The big story in London is renters being pushed into outer London in search of affordability,” said Donnell.

Hair stylist Solomon, 29, spent weeks frantically looking for a room after his landlord gave him notice to leave his Camberwell flat. After repeatedly being outbid, he decided to cut his losses and move to Basingstoke in Hampshire.

“I can either spend lots of money to be in London — in a place I won’t be comfortable in with damp and mould that affects my mental health — or I take the plunge and move out of London and deal with commuting,” he said.

Solomon, whose commute to Peckham in south London now takes more than an hour, said leaving the capital was the only way he could live alone in a well-kept, functioning flat.

“My work and career is in London, all my friends are there, but the things I need at my stage in life are home and security,” he said. “London wasn’t able to provide that for me any more.”

Investors raise questions after Sequoia Capital’s turbulent year

Silicon Valley’s premier venture firm undergoes ‘profound change’ after China splits and bets on FTX and Twitter sour

Over the most tumultuous 12 months in its 51-year history, Sequoia Capital has spun off its highly profitable Chinese arm, slashed the size of a crypto investment fund and lost key partners including veteran Michael Moritz.

Now, Silicon Valley’s most storied venture capital firm is fighting to retain the confidence of its own investors.

At least one large Sequoia backer is weighing its future position in the US firm and others are concerned by recent mis-steps, including a $225mn bet on failed cryptocurrency exchange FTX in 2021. One of Sequoia’s longest-standing backers deemed that deal a “humiliation [that] is unique in their history”.

This summer, Roelof Botha, Sequoia’s chief, travelled across New York, Boston and California’s Bay Area to meet more than 50 of the firm’s biggest “limited partners”, who invest in its funds.

July’s trip was not to fundraise but to ease concerns from the financial institutions, pension funds and family offices that have poured billions of dollars into Sequoia on the back of its reputation as one of the world’s savviest investors in tech start-ups, including Apple, Google, Instagram and OpenAI.

“Who do they want to be; what’s their brand?” said the head of one Sequoia LP, a sovereign wealth fund. He will continue to back Neil Shen, the billionaire boss of Sequoia’s soon-to-be-separate Chinese arm, but is evaluating his position in Sequoia Capital, the US and European business.

“We know what Neil Shen wants to be: the most successful investor in Asia,” he said. “What about Sequoia US?”

“Our goal is to be the top-performing investment partnership in the world,” Botha told the Financial Times. “Just as it always has been.”

On the US trip, Botha and top lieutenants Alfred Lin and Pat Grady reassured LPs that slimming down alongside other changes at the firm, such as new vehicles to invest in companies from their inception to long after they had gone public, have deepened ties to start-up founders and set up the firm to capitalise on a boom in artificial intelligence.

This account of a period that another Sequoia investor describes as “the most profound change in the firm’s history” is based on more than 20 interviews with its limited partners, current and former investors at Sequoia as well as rival groups, and start-up founders.

Despite the turbulence of the past 12 months, Sequoia is confident its LPs will stick by it. “The fact we’ve had 51 years of good performance gives us breathing room,” said one venture capitalist at the firm.

In June, Botha moved to unwind Silicon Valley’s most ambitious, and successful, attempt to build global power.

Sequoia’s US and European operations were to break away from its China arm, managed by Shen, who had led early successful investments in Alibaba and TikTok parent ByteDance.

The Chinese unit, renamed HongShan, a Chinese translation of Sequoia, will remain in charge of nearly $56bn in assets under management. Sequoia’s Indian and south-east Asian business would form a third entity.

The move followed months of pressure from Washington over investing in China. Sequoia’s Chinese arm had previously taken controversial stakes in sanctioned drone maker DJI and surveillance start-up DeepGlint.

Weeks after Sequoia announced the split, the White House issued an executive order limiting US investment in technologies such as AI which could further Chinese national security.

Although Sequoia Capital’s move will end a lucrative profit-sharing arrangement with its Chinese arm, and likely limits future investments in big Asian markets, one person close to the firm said it would resolve a political headache.

“Sequoia was not mentioned in the executive order. Before the separation, I’m sure it would have been,” they said.

Ana Marshall, chief investment officer at the $13bn Hewlett Foundation, which has been a Sequoia LP for 20 years, argued the split was “courageous” and allows Botha and his team to focus on investing, rather than managing a complex global firm.

“I don’t know how often they were on calls with China and India, but I’m excited they are back doing what they are best at,” she said. “LPs should be thrilled that just happened.”

In 2021, Sequoia made a $225mn investment into FTX, later publishing a hagiographic 13,000-word blog on its founder, Sam Bankman-Fried.

The following year, FTX collapsed. Bankman-Fried is awaiting trial for fraud. Sequoia’s investment has been wiped to zero. The blog has been deleted but its legacy will not be so easy to erase. One Sequoia LP called the affair an “unmitigated disaster”.

The firm recently slashed the size of its fund dedicated to investing in crypto companies from $600mn to $300mn.

The decision to invest $800mn into Elon Musk’s $44bn purchase of Twitter last year also raised some LPs’ eyebrows.

Botha has said Musk gave him his first job offer to join PayPal in 2003. Sequoia has backed other promising Musk ventures, including SpaceX and the Boring Company. But by Musk’s own estimation, Twitter, now rebranded X, is worth less than half what he paid.

“I wasn’t surprised they backed him,” said the head of an investment fund that is one of Sequoia’s top LPs. “I think they view him as part of the Sequoia family. I don’t perceive it as tainted by personal conflict. It’s a question of ‘do Elon’s plans make sense and was the price sensible.’ Right now obviously not, but it’s too soon to tell.”

China, FTX and Musk may have dominated headlines, but LPs said the most consequential of Botha’s changes is likely to be the success of a new investment vehicle called the Sequoia Capital Fund.

VCs traditionally earn their fees by backing start-ups at an early stage and cashing out at a public listing or a sale.

Sequoia’s new fund, announced in 2021, breaks from that by holding on to stock of companies even after they IPO, based on Botha’s conviction that certain tech stocks will continue to outperform long after going public.

The fund — alongside a new accelerator programme for early stage companies called Arc — positioned Sequoia to provide companies with “permanent capital” throughout their lifetimes, according to LPs.

Others said the new fund was a response to increased competition from groups such as Andreessen Horowitz, SoftBank and Tiger Global which were investing heavily at the time, creating a “sellers market” for stakes in start-ups.

“Sequoia will do everything to stay on top,” said Eric Doppstadt, chief investment officer at the Ford Foundation, Sequoia’s longest-standing LP. “They are never a firm you could accuse of being complacent.”

Sequoia has rewarded LPs for their faith. A person with knowledge of the firm’s finances said that in the last four and half years, from just $2bn invested into start ups, it had distributed $34bn in cash and stock.

So when the Sequoia Capital Fund launched in 2021, almost all LPs opted to roll their money into it. With the alternative being shut out of Sequoia’s future investments, some felt there was little choice.

Over the next few months, the Sequoia Capital Fund was hit by the broader market downturn which 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.

The fund has since rallied, outperforming the Nasdaq this year, according to a person with knowledge of the fund’s performance.

“If [the new fund] allows Sequoia to hold a security that becomes a Google or Amazon outcome, the early pain will be forgotten,” said one backer.

“These are radical changes,” said another of Sequoia’s longest-standing LPs. “It’s difficult to cut the size of your firm, cut two funds, sever ties with your international entities and undergo a leadership transition. It’s an absolutely enormous amount of change for an organisation and it’s too early to say if it will be successful.”