Sovereign wealth funds have participated in $17 billion of venture capital deals so far this year, already more than the entirety of 2019, as their appetite for long-term investment appears undimmed by the coronavirus outbreak.
The investments are against a backdrop of a generally subdued deal-making environment across the venture capital industry in the aftermath of the pandemic.
With their deep-pockets and longer investment horizons than many other investors, sovereign funds have increasingly sought out start-ups, particularly in technology in the hope they will yield outsized returns.
Abu Dhabi-based Mubadala has been involved in one of the largest deals so far this year, participating in a $3 billion investment in Waymo, the self-driving technology company owned by Alphabet, parent of Google (GOOGL.O), according to PitchBook data. The deal, which closed last month, included investment from the Canada Pension Plan Investment Board, Magna International and Andreessen Horowitz.
“Sovereign funds are very focused on emerging industries and can invest for the future as early stage investors,” said Will Jackson-Moore, global private equity, real assets and sovereign funds leader, PwC. “They’ve been wanting to increase investments (in venture capital) for a long time but often its been access to the funds that has been difficult as everyone wants to be in the best performing funds.”
High valuations for mature private companies from ready access to capital and an abundance of cheap debt encouraged sovereign funds to seek out earlier-stage investments, since 2017 particularly in healthcare and technology, where more companies were looking for cash and sovereign funds perceived value, the International Forum of Sovereign Wealth Funds (IFSWF) said in a report last month.
With the economic fallout of the pandemic having dented valuations and pushed up debt funding costs for start-ups, analysts are waiting to see how that will impact sovereign funds’ continued participation in venture capital investing.
So far this year, there had been $16.9 billion venture capital deals with sovereign wealth fund involvement, according to PitchBook data. Some of the deals were executed or under process before the outbreak spread widely.
That’s up from $15.6 billion across the whole of 2019. But deal flow will have to accelerate if is to match the $42 billion level reached in 2018.
In addition to Mubadala’s deal, there were two other large investments so far this year. Singapore’s Temasek Holdings participated in a $3 billion investment in Chinese live-video streaming firm Kuaishou alongside Tencent Industry Win-Win Fund and several other investors.
Cool Japan Fund, in which the Japanese government is one of the shareholders, invested in a $3 billion deal in Indonesian ride-hailing and payments firm Gojek alongside others such as Alphabet, Facebook (FB.O) and Tencent Holdings (0700.HK).
In total, around $130 billion in venture capital has been raised in the year to date, compared to $270.3 billion in all of 2019, PitchBook data shows.
KPMG said it expected the second quarter to be “rough” for venture capital investment, but noted sectors such as health and biotech may be attractive for investors.
“While there continues to be an enormous amount of dry powder in the global VC market, many investors will likely sit on the fence until the ramifications of the pandemic become clearer,” it said in a report in April.
In comparison to venture capital, sovereign wealth funds have been less active in private equity deals this year.
Of the $28 billion in deals involving them so far, a large proportion of the amount was accounted for by Singapore’s GIC’s participation in a $22 billion investment in Ultimate Software Group UL1.QTX, a cloud-based human resources applications developer, alongside Hellman & Friedman, JMI Equity, Kronos and Blackstone Group (BX.N).