State-owned investors pile into herds of tech unicorns

Sovereign wealth and public pension funds are piling into venture capital megadeals beyond Silicon Valley, even as frothy valuations raise fears of overheating among a surging number of unicorns.

The promise of returns at multiples of equity markets has made venture capital inviting for state-owned investors, while their deep pockets make them enticing backers for cashhungry start-ups.

In the first nine months of this year, state-owned investors made $14.9bn in venture capital investments, up from $8.9bn across all of 2020, data from Global SWF showed.

Participation by sovereign wealth funds and other government funds in US venture capital deals by value reached a fiveyear high by the end of June, according to PitchBook data.

While the US represented almost half of all capital flows by sovereign investors into venture capital in 2020, it accounted for only a third of the deals seen in 2021, according to Global SWF, with China and India sucking in more flows to capture 40% of the 2021 total.

“Technology, as a whole, is everywhere, from food to transport, energy to logistics. Now it is seen as a good opportunity to diversify a portfolio,” said Javier Capape, director of sovereign wealth research at the IE Center for the Governance of Change.

“There are enough investable projects globally and more established teams around the globe to identify them. The [Covid-19] pandemic has not stopped this trend, and virtual pitching has overcome it successfully.”

In a deal typical of recent trends, Indian cloud kitchen company Rebel Foods this month raised $175m in a Series F funding round, led by Qatar Investment Authority (QIA). Along with several other stateowned investors, QIA also invested in a $3.6bn deal for India’s Flipkart.

Having made a $1.2bn investment in India’s Jio Platforms in 2020, Abu Dhabi’s Mubadala is eyeing more opportunities in Southeast Asia, Ibrahim Ajami, its head of ventures and growth, said in a recent podcast. “We are focused on expanding into this region [India and Southeast Asia] because that is a very large population, a digital-first population, very mobile, very tech-savvy,” Ajami said.

Sovereign funds’ interest, along with that of other, newer market entrants such as private equity firms, hedge funds and mutual funds, has fuelled a venture capital boom, stoking worries about rich valuations.

The number of unicorns privately held start-ups with a valuation of more than $1bn rose 16% to 842 between June and September, according to CB Insights, which expects the overall number to break 1,000 by early 2022.

The rise in part reflects more companies opting to stay private for longer during a time of uncertainty about the postpandemic outlook for equity markets.

While venture capital allows state-owned investors to participate in early-stage deals, among sovereign funds there has been a shift to investing in more mature start-ups.

State-owned investors see unicorns as a way to generate outsize returns in a low interest rate environment. US venture capital consistently outperformed broader equity market indices over periods of three, five, 10, 15 and 20 years, Cambridge Associates data shows.

A huge majority of sovereign wealth deals in the US during 2021 have been at $100m or larger, notes Kyle Stanford, analyst at PitchBook.

“As the megadeal market has grown, sovereign wealth funds have found more opportunities to put huge chunks of capital to work in single deals,” said Stanford. “These funds are huge, and so for many, smaller deals do not offer the return necessary to make the deal worthwhile.”

Record exit values from venture capital-backed firms are helping justify hefty investment levels, say analysts. That could change if an expected tapering of US bond purchases sends ripples through public markets and dampens appetite for initial public offerings, a popular exit route.

But sovereign funds can handle that risk better than most, Will Jackson-Moore, global private equity, real assets and sovereign funds leader at PwC, said.

“The effect on their overall portfolio can be relatively modest as [venture capital] is a highalpha, high-risk part of their overall strategy,” he said. Because they are large pools of capital, he added, “they are better positioned to take on the risk”.