Coatue Management is looking to lift returns for clients in a growth equity fund that invested at the peak of the market by raising money for new, cheaper deals as the tide has turned.
(Bloomberg) — Coatue Management is looking to lift returns for clients in a growth equity fund that invested at the peak of the market by raising money for new, cheaper deals as the tide has turned.
The firm is offering those in its $7.6 billion Growth Fund 5 a chance to invest in a companion vehicle that seeks to snap up stakes in late-stage startups at better prices and terms. In exchange they will receive various fee breaks, Coatue told investors in a letter seen by Bloomberg.
A spokeswoman for the firm declined to comment.
Coatue’s move addresses one of the most challenging conundrums venture and growth equity investors have faced in years. A horde of these firms, drawn to the promise of fast-growing startups, poured money into splashy technology darlings and bid up their valuations, only to get burned in last year’s tech swoon.
Many of their investors are being cautious about parting with cash just when bargains are appearing. Coatue, which slowed its private bets last year and shifted equity wagers to cash, is now preparing to dive back in.
The majority of investments in the new pool, Growth Fund 5-B, will focus on companies the firm hasn’t previously backed, according to people familiar with the matter. Still, some will be top-ups of existing stakes made by negotiating deals with sellers needing cash.
Launched two years ago, Growth Fund 5 invested in about 100 companies, many of them at steep valuations, according to the letter. In late 2021, it significantly limited new bets. The fund is still sitting on about $1 billion of dry powder and will deploy that cash alongside Fund 5-B’s deals, the people said.
“The most difficult market environments can often yield the greatest opportunity for returns,” Coatue founder and Tiger cub Philippe Laffont wrote in the letter, adding he would make “a significant contribution” to the fund.
Coatue is prioritizing clients already in the past fund, waiving their management fees and giving them discounted carried interest — or a larger share of profits after returns.
Read more: Coatue Ramps Up Stock Wagers After Months of Holding Its Cash
Laffont called the current environment — with plunging valuations in private growth companies and fewer unicorns going public — a “pivot point” comparable to the 2008 financial crisis, Covid selloff and the dot-com bust, which led to some of Coatue’s strongest gains.
The firm now sees potential for “very meaningful returns.” Artificial intelligence, in particular, is “hands down the most exciting trend I have seen in my investment career,” Laffont wrote.
Coatue pointed to a recent wager in enterprise software company OneTrust as a “blueprint” of what’s ahead. As an existing investor, the firm privately negotiated a deal to increase its stake and take a board seat. It expects to do more such arrangements that involve greater engagement with founders, bigger investments, more ownership and governance and lower entry prices, the letter said.
“We foresee more of these types of insider-led transactions with so many companies fighting for survival and/or seeking to restructure and evolve,” the letter said.
Coatue’s Growth Funds 1 through 5 returned a net internal rate of return of 18% and three times its invested capital through March.
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