More and more investors are clamouring to identify technology ‘unicorns’ ahead of the game by pouring money into early-stage venture financing in what is a particularly notable trend among sovereign wealth funds.
But Singapore’s GIC already has a huge head start on most of its peers, having expanded into private venture capital investment by opening an office in 1986 in California's tech mecca, Silicon Valley. Other state investors are increasingly following suit.
Chris Emanuel and Jeremy Kranz, San Francisco-based co-heads of GIC’s technology investment group, are better placed than most to track how the venture capital landscape is shifting – and to adapt accordingly.
“We are almost at the point where every company is a tech company,” Kranz said. “The blurring of industry segments means that investors must look beyond traditional investment classifications and labels.”
As technology becomes a deeper and more intricate part of all companies, no matter where, “discerning investors will need to look beyond simple categories”, he said.
This evolution fits with GIC’s overall approach to investing: it has no fixed allocations to specific geographies and sub-sectors, Emanuel said, but rather studies trends for areas in which to conduct deeper research for potential opportunities.
In tech, as in other sectors, the SWF deploys capital at all stages of a company’s life cycle – from pre- to post-IPO, Kranz added. And it has innovation hubs in the US, China and India, which helps it spot leads and lags across regions.
In addition, GIC’s experience in stock market investing means it can guide founders on how to operate as a listed company and support them during the transition from private to public.
Multi-asset capabilities also come into play for the fund, which has $398 billion under management, according to the Official Monetary and Financial Institutions Forum. For instance, given its large real estate investment team and range of partners in that space, GIC can engage property tech startups that are looking to grow.
Just this week it highlighted the benefit of combining tech and real estate know-how by jointly investing $1 billion with data centre provider Equinix into European ‘hyper-scale’ data centres.
AHEAD OF THE CURVE
While Asian SWFs, most notably GIC and Temasek, have been dominant players in direct technology investment for a long while, the trend is spreading.
In 2018, 17 different SWFs participated in venture deals, compared with just seven before 2014, according to a study released in April by Spain’s foreign trade institute Icex and the Madrid-based IE Business School.
A growing number of SWFs are now setting up offices in San Francisco to be closer to Silicon Valley. Temasek did so in early 2017, and Saudi Arabia’s Public Investment Fund said in February it was planning such a move. They join the likes of Malaysia’s Khazanal Nasional, Abu Dhabi’s Mubadala Ventures and Qatar Investment Authority, which have presences in the US west coast city.
Moreover, data published in May by the International Forum of Sovereign Wealth Funds (IFSWF) shows SWFs executed a record-high 63 deals across different stages of venture financing in 2018. That was nearly quadruple the 17 in 2015, with the growth largely driven by flows into the earlier (A to D) funding rounds (see graph below).
Again, Asian funds have dominated this activity but other SWFs are starting to get in on the action in direct investments.
Sector-wise, software & services has seen the most rapid inflow of sovereign capital globally in the past few years, with $2.19 billion of deals recorded last year, up from $882 million in 2017 and $91 million in 2016, according to IFSWF.
Australian superannuation funds such as Hostplus and First State Super have also been ramping up their commitments to tech in the past few years – albeit via venture managers rather than directly. According to data provider Preqin, 160 venture deals worth A$2.2 billion ($1.52 billion) were done in Australia last year, a 77% increase over 2017.
The increased availability of capital is affecting how companies finance themselves.
Traditionally, Emanuel said, corporates go public to raise capital to fund their growth, provide liquidity to their early investors and raise their profile – if the latter is needed. Today, there is enough private capital for companies to achieve the first two objectives without going public, he noted.
“Companies are staying private roughly two times longer than in past cycles and we have seen late-stage valuations increase materially.”
But while corporate business strategies are having to change, technology in itself isn’t the solution to everything, Kranz noted, citing the example of the insurance industry.
“To that end, insurtech firms have set up physical brick-and-mortar shops to serve their customers,” he said. “The next chapter of tech enablement will be about the combination of offline-to-online and online-to-offline models.”
Having multi-national and multi-sector expertise is thus likely to be ever more important.