The decision by Singapore sovereign wealth fund Temasek and fund house giant BlackRock to launch a climate-focused venture capital (VC) firm underlines the interest that sustainability is playing among the world's largest investors.

But while such new initiatives could prove of interest to other SWF peers, it may have limited influence among smaller sovereign wealth funds that tend to be wary of venture capital investing, argue industry experts. 

On Monday (April 12), Temasek and BlackRock announced that the new firm, named Decarbonisation Partners, will seek late-stage investment opportunities in firms with emission-lowering technologies in need of capital for expansion and commercialisation.

The SWF and world's largest fund manager together committed an initial $600 million to the new VC firm, including $300 million to seed its first fund. It aims to raise a total of $1 billion with input from external institutional investors.

Diego Lopez

Diego Lopez, managing director of US consultancy ‎Global SWF, thinks the partnership is timely.

“State-owned investors are pressured to take their sustainability efforts to the next level, and a partnership like this makes a lot of sense,” he said.

He believes Temasek, which is Blackrock’s fifth-largest shareholder, will be able to leverage the asset manager’s data analytics capabilities. For Blackrock, in turn, it's Temasek’s footprint in VC.

Indeed, Temasek is an active investor in startups and was the world’s top sovereign wealth fund tech investor in 2020, according to Global SWF’s latest report.

A spokesperson for Temasek confirmed the new VC firm is a 50:50 partnership but declined to comment on the breakdown of the contribution by each party. In response to questions on the governance structure of the fund, the spokesperson said these mechanisms were being discussed and would be announced in due course.

Dilhan Pillay

“This partnership with BlackRock is one of several steps we are taking in our journey to cut the emissions from our portfolio by 2030 to half of the 2010 levels, and ultimately reach net zero by 2050,” the spokesperson told AsianInvestor.

SEEKING SUSTAINABLE PROFITS

Temasek is no doubt scouting technologies that have synergies with its existing investees.

The Singapore state fund, which manages S$306 billion ($214.6 billion) in assets as of March 31, 2020, is a majority shareholder in the likes of Singapore Airlines, Singtel and DBS Bank.

The announcement said Decarbonization Partners would focus on sectors such as emerging fuel sources, grid solutions, battery storage and autonomous vehicles.


 

While the new VC has wider sustainability goals, Temasek and BlackRock are adamant that the firm is profit oriented.

“We are not going to look at sacrificing returns,” Dilhan Pillay, CEO of Temasek International and incoming CEO of Temasek Holdings, told Bloomberg. It is targetting annualised returns of “about 20%”, albeit over the long term given the early-stage nature of the partnership, Pillay added.

Liqian Ma

Besides bringing down so-called green premiums – the additional cost of choosing a clean over a traditional technology – Pillay says early-stage investing has allowed some new solutions to become “acceptable”, citing alternative proteins - plant-based meat substittutes - as an example.

Temasek is an investor in US’s Impossible Foods, Singapore’s Next Gen and Australia's V2food - all of these plant-based meat substitutes are now ubiquitous in restaurants and supermarkets.

For consultants, it's a sign that more sovereign wealth funds are eyeing VC as an asset class, either in search of yield, diversification, or as a means of meeting climate/ESG goals.

"We are not surprised to see asset owners with large pools of capital continue to more intentionally invest in climate tech," said Liqian Ma, head of sustainable and impact investing research at Cambridge Associates.

"This is driven by the desire to capitalise on a growing opportunity set in venture capital, as well as a view that contributing to climate can de-risk and stabilise the broader system in which we reside and operate.”

GROWING VC APPEAL?

However, Temasek remains among a handful of sovereign wealth funds active in VC. Asset owners have traditionally shied away from it due to smaller fund sizes and the higher risk associated with early-stage investments.

The exceptions are Australian superannuation funds, such as Hostplus and First State Super, which see investing in VC as a way to foster tech innovation.

Other large state funds such as the UAE’s Mubadala, and Saudi Arabia’s Public Investment Fund are both limited partners in VC firms – such as Softbank’s $100 billion Vision Fund I – and direct investors in startups.

Global SWF’s report shows 2020 was a record year for direct tech investments by sovereign wealth funds. These totalled $12.7 billion, up 74% up from the previous year, according to the report. IT and biotech investments were among the major sectors.

Lopez believes VC activity may increase among other large sovereign funds such as Abu Dhabi Investment Authority, China Investment Corporation and Qatar Investment Authority. However, he is unsure whether, because of its small scale, it meets the needs of smaller sovereign wealth funds.

These often need to deploy large amounts of capital per investment. Private equity (PE) is therefore often preferred by asset owners looking to increase their allocation to alternatives.

The latest move by Temasek comes on the back of a $500 million investment in impact PE firm Leapfrog in March. In December, Temasek International also hired Steve Howard as its first chief sustainability officer.

This story has been updated to clarify the level of appeal this sort of venture capital fund may have with other sovereign wealth investors.