Sovereign Wealth Funds Reduce Investment In Start-Ups In 2019

In the months following the failure of the planned initial public offering (IPO) of WeWork, there has been a steep drop in the investment in venture capital deals by sovereign wealth funds which pushed it to touch its lowest in six years for the entire year of 2019.

According to research from ICEX and the Spanish-based IE Center for the Governance of Change, in 2019, the total sovereign wealth-backed venture capital rounds dropped to $7.2 billion compared to the record value of $31.6 billion in the previous year.

According to Javier Capape, the center’s director of sovereign wealth research, this trend could be indicators that sovereign funds were currently averse of investing in the start-up sector as a fall out of the failed IPO of the office-sharing firm WeWork as well the hugely underperforming IPO of ride sharing company Uber.

SoftBank’s Vision Fund had made large investments in both the companies while the Vision Fund was significantly funded by cash from Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment.

The aim of sovereign funds choosing to invest in venture capital sectors in recent years was to take benefit from the strong returns from technological innovation, broaden their assets and even to diversify their local economies in some cases. About 9 per cent of the global venture capital deals by dollar volume were accounted for by sovereign funds in 2018.

Capape said that in the six months since WeWork decided to abort its planned IPO launch in September 2019, the deal value has more than halved to $2.4 billion compared to the value in the previous eight months.

He said that this loss in interest was seen right across the investment sector.

“We’ve not observed many sovereign wealth funds joining direct investment in recent months. Maybe they are taking decisions, going on hold for a while, applying more scrutiny of the selection of venture capital managers or reconsidering other investment areas,” he said.

Deals in which sovereign funds participated in directly was included in the research.

It is more difficult to assess the amount of investments by sovereign fund through other funds such as the Vision Fund because their limited partners are typically not disclosed by most venture capital or private equity fund managers.

And even in those cases where the partners are known, the amount of investor commits is generally not revealed.

In -house teams to make investments directly have been built up in recent years by the likes of Singapore-based sovereign funds Temasek, GIC and Mubadala.

In 2018, these funds had participated in the $14 billion financing round of the Chinese online payment platform Ant Financial Services Group which was marked as one of the largest ever single fundraisings in the world by a private company.

However it is expected that there will be growth interest in direct venture capital dealmaking in the coming years.

“The smaller, pinpoint type direct VC investments are very much in flavor,” said Tihir Sarkar, London-based partner at Cleary Gottlieb, which counts several prominent sovereign funds as clients.

(Adapted from Reuters.com)



Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability, Uncategorized

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