Investing in technologies of the future are now top of mind for sovereign wealth funds, led by Singaporean investors Temasek and GIC.
“Sovereign wealth funds are a group that follows the leaders,” Javier Capapé, director of the Center for the Governance of Change at IE University, told Private Equity International. GIC and Temasek began exploring earlier stages of investments in 2014 in technologies such as biotech, mobility, blockchain and artificial intelligence, Capapé said. This has motivated other state investors to create internal teams and access entrepreneurial ecosystems in Silicon Valley, New York and China, he added.
The S$308 billion ($229 billion; €202 billion) Temasek has backed global tech companies including Indian digital payment platform Pine Labs; Chinese electric vehicle company NextEV; and Impossible Foods, a California-headquartered plant-based food company. Technology will be a key area of investment over the next five years, Temasek International’s president and chief operating officer Chia Song Hwee said in 2017.
GIC, which has around $390 billion in assets according to its 2017-18 annual report, invests directly and through external fund managers in start-ups, growth companies, and pre- and post-listed companies. GIC and Temasek were part of a group of investors that last year backed the $14 billion mega round of Ant Financial Services Group, the operator of China’s largest online payment platform.
Increasing capital deployment in early-stage rounds is way for SWFs to hedge their portfolio to gain access to the leaders of the future, Capapé noted. An existing investor in a hotel management company can “play both sides” by investing in industry disruptor Airbnb for example, he added.
SWFs joining the game, entering mega rounds and adding billion of dollars to start-ups underscores the broader trend of venture-backed companies staying private longer, Capapé said.
According to Sovereign Wealth Funds 2018, a report by IE University and ICEX-Invest in Spain, the number of SWFs participating in investment rounds with other venture capital investors has grown exponentially over the last five years. SWFs participated in 220 VC rounds between 2014 and 2018, while from 2009 to 2013 the figure was just 14.
Geographically, the US remains the preferred country for SWFs to hunt for start-ups, while China is the second favourite. Both had an aggregated share of deals surpassing 80 percent in 2018. Aside from India and the UK, venture firms in Germany, Brazil, South Korea, Spain and Indonesia have also caught the eye of SWFs, the report noted.
By sub-sector, biotech and healthcare have dominated in the last five years with 20 percent of total venture capital investment rounds. There is also growing interest in start-ups focused on fintech, mobility services and agriculture.
In terms of activity and deal exposure, the report found that venture capital has experienced “an enormous push” from GIC and Temasek, with the investors jointly representing 60 percent of all VC deals last year.
Among SWFs, Australia’s Future Fund, Malaysia’s Khazanah Nasional, the UAE’s Mubadala Investment Company and Ireland Strategic Investment Fund have been following closely in GIC and Temasek’s footsteps, the report noted.
Future Fund wants to invest more in Chinese start-ups, deputy chief investment officer of private markets Wendy Norris said at a panel at the Australian Investment Council conference in Sydney in March. Norris said the fund was “devoting a lot of attention to understanding that dynamic and working out how to access that market”, as reported by The Australian Financial Review.
Khazanah’s deputy managing director Ahmad Zulqarnain Onn has said the SWF needs to take advantage of technology, highlighting that its impact on productivity is a key focus area in the next five to 10 years.
Mubadala committed $15 billion to SoftBank Group’s Vision Fund, while ISIF teamed up with China Investment Corporation last year to set up a €150 million tech fund for start-ups in China and Ireland.
Returns in early-stage companies remain an unanswered question, Capapé said.
“In many cases these SWFs still haven’t exited their venture capital positions… It’s still to be seen whether these investments will perform well; valuations often tumble after an IPO. It could also be a case where the newer entrants have invested too late in the funding cycle.”