Coatue, JPMorgan Weigh Funds to Buoy Capital-Hungry Startups

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(Bloomberg) — Coatue Management is raising a structured equity fund that could help cash-strapped startups stave off raising money at lower valuations amid turbulent public markets, and JPMorgan Chase & Co. is weighing a similar fund, according to people familiar with the matter.

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Philippe Laffont’s Coatue has begun discussing its planned Tactical Solutions Fund with potential investors, some of the people said. The firm is targeting $2 billion for the effort and already has raised $1.2 billion from anchor investors, a presentation shows. While it will mostly provide capital to publicly traded companies, about 20% will be earmarked for closely held startups, potentially including those the hedge fund has previously backed, one of the people said.

The fund will deploy capital to the same sectors where Coatue typically invests, including enterprise software, health care, climate technology, consumer internet and financial technology. The alternatives arm of JPMorgan’s asset-management unit is in the early stages of exploring whether to raise a fund that would pursue a related strategy, some of the people said.

Representatives for Coatue and JPMorgan declined to comment.

Coatue has told investors that structured equity may appeal to dilution-sensitive companies whose boards may be reluctant to issue equity at depressed valuations, even as they burn cash to maintain their rapid growth, according to the presentation reviewed by Bloomberg. It may also be a capital alternative for firms whose shares have tumbled this year that are seeking cash as an insurance policy or to consolidate or restructure themselves.

More companies may seek capital in part because of a slowdown in the market for initial public offerings as well as scarcity of private funding, the presentation shows. Coatue intends to make a “significant” capital commitment to the fund and invest the war chest within two years, though it has an option to extend that period by an additional year.

The vehicle will charge early investors a 1.5% management fee, which can be adjusted based on the size of a commitment. The performance fee is 20%. The fund has a 5% hurdle, one of the people said, meaning it will have to produce that return before collecting a fee.

Structured equity, which features both debt and equity characteristics, generally includes convertible debt, senior equity or debt plus warrants. It differs from traditional growth equity funding, which tends to take the form of common equity.

Annualized returns on structured investments, which often resemble convertible debt, outperformed in past episodes of market turmoil, particularly the 2000 dot-com crash and 2008 financial crisis, according to the presentation.

Coatue’s flagship hedge fund — which invests in publicly traded stocks and private startups — fell about 2% last month, extending its decline for the year to roughly 17%, according to a person familiar with the matter. Peers including Dan Sundheim’s D1 Capital Partners and Chase Coleman’s Tiger Global Management are also deep underwater so far in 2022.

If portfolio companies turn to structured equity as an alternative to common equity, investment firms may be able to continue marking companies’ valuations at the level in which they last raised common equity. To be sure, such marks may face scrutiny from limited partners if rivals or mutual funds write down their holdings in the same companies to varying degrees.

(Updates with descriptions of size, fees from second paragraph.)

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