Tom Arnold

LONDON (Reuters] – Public pension funds and sovereign wealth are putting money into mega venture capital deals outside Silicon Valley, even though frothy valuations increase fears about overheating among a rising number of unicorns.

State-owned investors have found venture capital attractive due to the promises of high returns and their ability to finance cash-strapped start ups.

Global SWF data revealed that in the first nine month of 2019, state-owned investors invested $14.9 Billion in venture capital, up from $8.9 Billion across 2020.

According to PitchBook data, participation by U.S. sovereign wealth funds or other government funds was at its highest level in five years as of June.

Global SWF found that the U.S. accounted only for a third (20%) of venture capital deals in 2020. China and India, however, absorbed more of these flows, capturing 40%.

“Technology as a whole is everywhere. From food and transportation to energy and logistics. It is now seen as a great opportunity to diversify a Portfolio,” stated Javier Capape (director of sovereign wealth research, IE Center for the Governance of Change).

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Other players, whether they are VC firms, or directly, have been dipping their toes into the VC market, including Abu Dhabi’s Mubadala venture capital arm and Canada’s pension fund OMERS.

Indian cloud cooking company Rebel Foods raised $175million in a Series F round of funding, which was led by Qatar Investment Authority.

QIA was also part of a $3.6 Billion deal to support Flipkart in India.

Mubadala made an investment of $1.2 billion in India’s Jio Platforms in the last year. Now, it is looking at more opportunities in Southeast Asia.

Ajami explained that the company is focused on expansion into India and Southeast Asia because of its large population. “We’re determined to expand in these regions (India, Southeast Asia),” he said.

Graphic: Sovereign wealth funds stampede into venture capital, https://graphics.reuters.com/SWF-VC/lgvdwlkzkpo/chart_eikon.jpg

LATER, BIGGER

Venture capital has seen a surge in investment, with concerns over high valuations.

CB Insights estimates that the total number of unicorns (privately held companies with more than $1 billion in valuation) grew by 16% between June and September.

Partially, this is due to more companies choosing not to go public during uncertain times for the equity markets after the Pandemic.

Although venture capital permits state-owned investors access to early-stage deals in their portfolios, there is an increasing trend among sovereign funds to invest in older start-ups.

Unicorns are seen by state-owned investors as a way of generating large returns in low interest rates. Cambridge Associates data shows that U.S. venture capital outperformed other equity market indexes for three, five and ten years, respectively, as well as the 15-, 20-, and 20 year periods.

According to Kyle Stanford (VC analyst at PitchBook), the majority of U.S. sovereign wealth transactions in 2021 were at least $100 million.

Stanford stated that “As mega-deal markets have grown, sovereign wealth fund’s have discovered more opportunities to invest large chunks of capital in single deals.”

“These funds have a huge investment, and smaller deals don’t offer the returns necessary to make it worthwhile.”

Analysts believe that venture capital firms have record exit prices, which is a reason for the high level of investment.

If the anticipated tapering in U.S. bond purchase sends ripples across public markets, and dampens demand for initial public offerings, which are a popular exit route, this could alter.

However, sovereign funds are better able to manage that risk than others, Will JacksonMoore, PwC’s global leader in private equity, real assets, and sovereign funds, stated.

He said that VC can have a minimal impact on overall portfolios because it is a high risk, high-alpha part of the overall strategy. He said that large capital pools make them better equipped to accept risk.

Graphic: Sovereign wealth funds ramp up later stage venture capital deals, https://graphics.reuters.com/SWF-VC/zgpomrbdopd/chart.png