China Investing: Sequoia revamped to beat Tiger. Now it is doing it again, to dodge US-China tensions

After the split, Sequoia China, which will adopt the name HongShan in English, can no longer be called American, (Source: Bloomberg)

Asset management, by definition, is global. Good fund managers scour the world for new ideas and opportunities for diversification. But these days, politicians are getting in the way, demanding de-risking, or decoupling,depending on who’s talking.

Sequoia Capital’s decision to separate its US and China businesses is a smart move amid growing geopolitical tensions. The Biden administration is widely expected to sign an executive order soon that will ban American
investments in advanced technologies in China, such as semiconductors and artificial intelligence.

The company has a track record of drastically revamping its fund structure to boost returns and fend off adverse macro trends. In late 2021, as New York-based hedge funds such as Tiger Global Management and Coatue Management crossed over to venture capital and wrote quick million-dollar checks to startups, Sequoia managed to stay prominent in an increasingly crowded space. It overhauled to become an investment advisor just like Tiger, as a way of attracting investors who prefer one-stop shops.

Breaking itself into three entities is Sequoia’s answer to de-globalisation. The White House’s imminent outbound investment ban puts a chill on venture capital. But it will also likely have plenty of loopholes that invalidates politicians’ intent, especially if a fund is willing to change its organisational setup.

First, what makes a venture capital firm “American?” Is it the domicile of the vehicle, the nationality of the manager, or does it become American if US-based investors constitute a certain percentage of the fund’s money?

Second, it seems the restrictions and reporting requirements will apply only to “active” investments, not passive portfolio holdings, according to
Gavekal Dragonomics, a research outlet. That frees up pension funds and endowments that invest in venture capital and leaves vehicles like Sequoia to be legally responsible for compliance.

After the split, Sequoia China, which will adopt the name HongShan in English, can no longer be called American, even by the biggest hawks in Washington. Its founder Neil Shen, according to Forbes, is a Hong Kong citizen.

This separation will free up Shen from onerous legal liabilities and compliance requirements in Washington, and allow him to concentrate instead on striking the next gold. Last year, he raised about $9 billion for deployments in technology and health care from investors around the world. It is a testament to his acumen, which includes backing the likes of ByteDance Ltd and JD.com Inc.

Meanwhile, Shen’s partners in Silicon Valley will most likely reap huge rewards from the stakes in these high-profile Chinese startups, The Information reported. The split does not affect investments that Sequoia’s US employees made in existing China funds, and the Americans do not plan to divest or sell their stakes in Sequoia China, according to the news outlet.

When there’s a will, there’s a way. During the pandemic, Sequoia worked out how to beat the aggressive crossover hedge funds that flooded the venture-capital world with cheap quantitative-easing money. It has also
presented a solution for asset managers who still want to diversify and believe in globalisation. In doing so, it shines a path forward for foreigners who still want to invest in China.

Views are personal and do not represent the stand of this publication.

Credit: Bloomberg