Sovereign wealth funds ramping up VC focus

More state funds are exploring early-stage technology investments, notably in Asia, as a less crowded space than traditional private equity, say industry experts.
Sovereign wealth funds ramping up VC focus

Sovereign wealth funds are showing growing appetite for venture capital (VC) investments in technology and are putting in place more resources to that end, according to industry experts.

This reflects a growing trend among institutions, which are seeking assets that offer greater upside than traditional private equity, which is a very crowded space these days. 

Sheila Patel, chief executive of international at Goldman Sachs Asset Management, told AsianInvestor: “Institutions that have not spent as much time on venture in the past are spending a bit more time on it now. It’s not just about driving returns but also about the information they can glean from VC investments in technology.”

For example, understanding the impact of cab-hailing apps will help them understand what’s happening in the broader transport sector.

What’s more, valuations are not as high for venture as for traditional private equity, said Patel. SWFs may want to look at the secondaries market in both venture and private equity, she suggested: “It’s less widely covered so offers a more appealing discount—that’s where some [SWFs] that are newer to venture are doing a bit of a catch-up.”

Not only does VC have the potential for larger and faster returns than PE, but it can also provide insight that can inform SWFs’ national agendas and the growth strategies of their portfolio companies, noted a September report by Boston Consulting Group (BCG).

Investors will typically target annual returns from a VC fund of at least 20% and a 3x overall return on their invested capital over up to seven years, or less if they allocate to a later-stage fund.

Traditional private equity investors might have targeted 20% a year and 2-3x return on investment a few years ago, but returns and expectations have dwindled as more money has poured into the asset class and competition for assets has grown increasingly fierce.

Tech momentum 

SWFs had in the past typically focused on mature industries, such as consumer, healthcare, retail, energy and financial services, but they are increasingly keen on technology, added BCG.

Technology startups in Asia—most notably China—are particularly popular, according to VenturePulse, KPMG’s quarterly report on global VC trends released on October 11. Companies in China accounted for half of the top 10 global venture deals between July and September, while 10 of the top 12 took place in Asia, said the document.

Chinese companies attracted $10.2 billion of venture capital investment with 95 deals over that period, while across Asia, VC-backed companies raised $12.3 billion over 283 deals, added KPMG.

VC is also attracting greater interest now, “because it provides more of a feeling of exclusivity, which I think PE has somehow lost”, said Paul Price, global head of distribution at Morgan Stanley Investment Management. “In venture you can still access pockets that others are not in.”

Much of the momentum towards tech deals is coming from SWFs in Asia and the Middle East, the latter with a view to helping diversify their economies away from hydrocarbons, noted the BCG report.

According to a report published by data provider Preqin in August, sovereign funds were involved in at least 40 major investments in start-ups in 2016. These were led by Singapore’s Temasek (with 17 deals), Khazanah (8) and Singapore’s GIC (7)—all experienced VC and startup investors.

Building capabilities 

Moreover, SWFs are building up their resources for making tech investments.

Temasek, seen as a leader in this space, opened a second office in San Francisco in February this year to target more US tech and life sciences investments. Qatar Investment Authority (QIA) also plans to open an office in San Francisco by the end of this year or early next. GIC and Khazanah already have branches in the city.

QIA is among those funds, notably from the Middle East, seeking to tap IT expertise to diversify their economies. Also in this category are Kazakhstan’s Samruk-Kazyna and Saudi Arabia’s Public Investment Fund, the latter with its commitment of $45 billion over five years to the $93 billion SoftBank Vision Fund, which launched late last year.

Meanwhile, wealthy Asian individuals remain interested in venture deals, but are being more selective than they were in 2015 and 2016, said Philip Ng, head of technology at KPMG China.
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