Sovereign Wealth Funds by Adam D. Dixon;Patrick J. Schena;Javier Capap;

Author:Adam D. Dixon;Patrick J. Schena;Javier Capap;
Language: eng
Format: epub
Publisher: Lightning Source Inc. (Tier 3)

Disruptive innovation

Many SWFs are not encumbered by current financial liabilities. This provides them with the flexibility to invest portions of their portfolios over longer investment horizons. Consequently, SWFs must monitor and adapt to long-term macroeconomic trends, such as the multi-decade structural decline in interest rates. New risks – such as climate change and the disruption posed to traditional industries by emerging technologies and business models – likewise challenge investment strategies and have opened the door to alternative approaches to asset allocation focused on longer horizons. The continued search for higher-yielding assets, coupled with the capacity of SWFs to invest directly and over extended investment horizons, has had a material impact on both scale and process in private capital – particularly private equity and venture capital (VC) – markets.

Consider, for example, Temasek and GIC, the two Singaporean funds. Both employ strategies that involve investing in new technologies and disruptive start-ups. In 2014 they were among a small group of five SWFs that accelerated participation in earlier-stage venture capital financing. As this strategy became more rooted in their investment models, both funds opened offices in San Francisco, New York and Beijing, to be closer to these markets so as to monitor trends and build local market expertise. Then little-known start-ups in which SWFs had invested in 2014–15 – Didi, Uber, Airbnb, Xiaomi and Snapchat – transformed into disruptive forces that have impacted traditional sectors, such as transportation, hospitality, electronic devices and social media. By 2020 increased capital flows to private equity and VC markets had driven up valuations, while adding to the “dry powder” of private equity and VC funds. In the intervening period at least 16 SWFs developed venture capital programmes, tripling the number of funds joining VC rounds (IFSWF 2020). Joined by other institutional investors, SWF direct and indirect investment in private equity contributed to a trend among venture-backed companies, such as Uber, to “stay private longer” (Erdogan et al. 2016).

Among preferred destinations for SWF venture investments in disruptive tech are the United Kingdom, Singapore and, among EU countries, Germany. Among emerging economies China and India dominate. The United States remains the strongest geography for SWF technology-focused investment, however, driven in large measure by the strength of a robust ecosystem to foster and finance technology innovation. For example, in the biotechnology sector, 61 per cent of SWF venture deals since 2005 were closed in the United States. Temasek, Mubadala and the Alaska Permanent Fund Corporation have led US SWF investment in the sector. In the Chinese biotech sector, which has received 19 per cent of investment, Temasek and GIC have led SWFs. During the Covid-19 pandemic SWFs have been active participants in record global deal volume, with 2020–21 dwarfing prior years’ activity.11

SWFs access private markets both directly and indirectly. The latter traditionally involves investing through a private equity limited partnership; the former involves deploying capital directly into private investments. A third model highlights the predisposition of SWFs to actively partner with or through experienced private equity professionals to leverage experience, local market expertise and deal flow.

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