As industry observers brace for the worst, a pair of investment giants have joined forces to capitalize on tech bargains.
Toronto-based Brookfield Asset Management and Silicon Valley’s Sequoia Heritage have reportedly teamed up to take advantage of the current environment. According to an Aug. 2 report from the Financial Times, Brookfield and Sequoia Heritage “are creating an investment vehicle to capitalize on plunging valuations of venture-backed companies.”
Public tech stocks have tanked, the initial public offering market has cooled, the merger and acquisition market has slowed down, venture capital (VC) investment has fallen, and startup valuations have dropped amid rising interest rates and other factors.
Pinegrove will have an opportunity to acquire stakes in private tech companies on the cheap.
These conditions have led some tech sector players to prepare for a “mass extinction event.” As VC funding has become more difficult to obtain and debt financing has become more expensive, a growing list of Canadian tech startups have already cut costs, sold for a fraction of their previous value, or shut down entirely.
In some cases, the shutdowns have been proactive, such as with GoodGood or Silofit. In others, like RenoRun, it has been a result of insolvency. Recent data indicates that this trend is not limited to tech: overall Canadian business insolvencies have been on the rise recently, increasing 36.9 percent year-over-year during Q2—a 10-year high.
VC funds and their investors have also felt the pain: demand for cash returns from limited partners (LPs) has already driven some VC firms to sell tech startup stakes via secondary markets, and some experts predict that more will follow.
Per the Financial Times, the two companies are investing $250 million USD apiece to found a new company called Pinegrove Capital Partners led by Brian Laibow, former co-head of North American operations of Oaktree Capital Management’s flagship credit fund, which is owned by Brookfield.
BetaKit has reached out to Sequoia Heritage and Brookfield for comment, but neither firm has responded by publication time.
Laibow’s LinkedIn profile describes Pinegrove as a “Sequoia Heritage and Brookfield-founded company” that aims to serve as “the trusted secondary and special situations capital partner for venture and growth [general partners] and LPs.”
According to the Financial Times, Brookfield and Sequoia Heritage will each own 50-percent stakes in Pinegrove, which also hopes to secure outside capital from large institutional investors, aiming for over $2 billion in total to target discounted tech startups.
If Pinegrove is looking to capitalize on low tech valuations, the firm will have a multitude of targets.
Per a May PitchBook report, during the first quarter of 2023, VC valuations in the United States (US) continued their descent, and down rounds increased. Pre-money valuations for venture-growth-stage companies in particular fell to a median of $90 million—a nearly 75 percent drop from the 2021 full-year record high of $355 million, according to PitchBook.
Amid these conditions, VC firms, including Union Square Ventures and Tiger Global, have marked down the value of their holdings, while others, like Sequoia Capital and Founders Fund, have scaled back their funds and expansion plans.
LPs, who have already seen losses from public market volatility that have lowered their liquidity and devalued their portfolios—leaving them over-allocated towards the VC asset class—expect their venture portfolios to take a big hit this year.
In this environment, Pinegrove, Brookfield, and Sequoia Heritage have an opportunity to scoop up stakes in privately-held tech companies on the cheap.
Brookfield is a global investment giant with over $800 billion in assets under management across real estate, infrastructure, private equity, and credit, including via its affiliate Oaktree.
Sequoia Capital is one of the largest VC firms in the world. Sequoia Heritage is a $16-billion fund that manages the wealth of Silicon Valley. Founded in 2010 with funding from senior partners at Sequoia Capital, including Michael Mortiz—who left Sequoia Capital last month to focus on Sequoia Heritage—Sequoia Heritage now invests separately from Sequoia Capital.
Pinegrove is not the first time that Brookfield has worked with Sequoia: the alternative asset manager has previously invested in and partnered with Sequoia China, which is being spun off from the VC firm’s US arm.
Feature image courtesy Brookfield via Twitter.