Sovereign funds seek diamonds in the Covid rough

Healthcare and technology start-ups remain hot property, but pandemic-fuelled uncertainty has led to lower valuations in some areas, such as travel-related platforms.
Sovereign funds seek diamonds in the Covid rough

As sovereign wealth and pension funds continue their push into early-stage investments, notably in healthcare and technology, Covid-19 has created more opportunities by pushing down valuations in some sectors.

Sovereign wealth funds may be using their cash reserves to buy stakes in companies as asset valuations fall due to pandemic-driven market uncertainty, say venture capitalists. Companies seeking funding, particularly at the earliest deal stages, will probably have to compromise on valuations, consultancy KPMG said in its Venture Pulse Q2 2020 report published in late July.

For instance, Indonesian travel booking app Traveloka said in late July that it had raised $250 million to address a downturn in business caused by travel restrictions. But this fresh funding round priced the company 17% lower than its most recent previous fundraising, reported Bloomberg. Backers of Traveloka include Qatar Investment Authority (QIA) and Singapore’s GIC.

Willson Cuaca,
East Ventures

“This won’t be a good time to fundraise because, no matter how good your company is, investors have a reason to squeeze you on the valuation,” Willson Cuaca, managing partner of Jakarta-based VC firm East Ventures, said during a webinar hosted by data provider Preqin on July 29. Traveloka is a portfolio company of East Ventures.

Sovereign wealth and pension funds are making venture capital investments despite the challenging market conditions. According to PitchBook data, SWFs had participated in $17 billion of VC deals in 2020 as of June 22 – already more than the $16 billion for the whole of 2019.

Moreover, Cuaca told AsianInvestor that East Ventures had engaged with at least four SWFs since last year, compared with none in 2018.


“Most [SWFs] are increasing their allocations to venture, with many focusing on opportunities in technology and healthcare sectors,” agreed Ben Hart, head of investor relations for Asia at US private markets investment manager Adams Street Partners.

Globally biotechnology was the most popular healthcare sector for private equity and venture investors during the first half of 2020, drawing $12.6 billion in funding, up from $7.3 billion the previous year, according to S&P Global Market Intelligence.

In Southeast Asia, the leading start-up sectors in the April-to-June period were e-commerce, which raised $691 million, logistics ($360 million) and fintech ($496 million), by DealStreetAsia figures.

The biggest capital raiser in that period was Indonesian e-commerce unicorn Tokopedia, which secured $500 million from Singapore state investor Temasek, according to DealStreetAsia. Tokopedia’s shareholders include East Ventures, Alibaba and Softbank.

Other venture fund managers seeing recent sovereign wealth and pension fund participation include California-headquartered DCM Ventures, which raised $880 million from US endowments and pension plans and European firms last month. The fund will target investments in Chinese start-ups, online drug distribution, video content platforms and cloud-based management software.

Ben Hart, Adams Street

Separately Beijing-based venture capital fund Sherpa Healthcare closed its first US dollar fund at $200 million, with LPs including public pension plans, family offices and other institutional investors, it said in a press statement on July 27. Half of the fund was reportedly taken by the Oregon Public Employees Retirement System.

Australia’s superannuation funds such as Hostplus have also been building their VC exposure, notably in domestic strategies, in recent years. Moreover, AustralianSuper and Hostplus were among the investors in Melbourne-based venture firm Square Peg’s A$350 million ($252 million) funding round targeting early-stage tech companies, reported DealStreetAsia, citing a company press release. 

Elsewhere in Asia, Korea’s National Pension Service added New York-based Insight Partners to its pool of overseas alternative investment managers in June. Insight, with some $30 billion under management, focuses on growth-stage software companies.


SWFs have really started ramping up their investments into venture capital and early- stage deals in earnest in the past five years or so. Further back they had not really been active in the sector, at least partly because of the relatively small ticket sizes it offers.

But as companies have been staying private for longer in light of the increasing availability of private capital, the opportunities for larger, later-stage investments have grown. And the potential returns and growth to be garnered from technology start-ups have become too great for the bigger institutions to ignore.

As they have built their exposure, a growing number of SWFs and big pension funds have also sought to build their in-house expertise in this area, with a view to making direct investments. Singapore's GIC and Temasek are among the leading investors in the technology venture investment space.

Wylie Fernyhough, senior analyst at research house PitchBook, said: “SWFs are seeing VC as a way to produce outsized returns in a world where alpha, especially in public markets, is so elusive.”

Indeed, Hart said Adams Street aimed to achieve returns from venture investments that outperform public markets by 300 to 500 basis points.

Still, a challenge for the larger sovereigns and pensions is the mismatch between their typically large ticket sizes and the relatively small size of the individual investment opportunities in the region, particularly earlier-stage opportunities.

Nonetheless PitchBook said in a report last month that it expected SWFs to do more direct deals and co-investments, especially in sectors such as technology and healthcare, and more early-stage VC deals and buyouts under $1 billion.

*This story has been updated to clarify <span style="font-family: " segoe="" ui",="" system-ui,="" "apple="" color="" emoji",="" "segoe="" ui="" sans-serif;"="">Tokopedia’s shareholders and clarify the name of Adams Street Partners.

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