Analysis-State investors step up unicorn hunt as valuations swell

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LONDON (Businesshala) – Sovereign funds and public pension funds are piling up in venture capital mega-deals beyond Silicon Valley, even as frothy valuations raise fears of overheating amid a growing number of unicorns.

FILE PHOTO: People walk in the Lujiazui Financial District during sunset on July 13, 2021 in Pudong, Shanghai, China. Businesshala / Ellie Song

The promise of returns at multiples of equity markets has made venture capital increasingly inviting for state-owned investors, while their deep pockets make them attractive supporters for cash-hungry start-ups.

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Data from Global SWF shows that in the first nine months of this year, state-owned investors made $14.9 billion in venture capital investments, up from $8.9 billion throughout 2020.

According to data from Pitchbook, the participation of sovereign wealth funds and other government funds in US venture capital deals by value reached a five-year high by the end of June.

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

“Technology, as a whole, is everywhere from food to transportation, from energy to logistics. This is now seen as a good opportunity to diversify a portfolio,” said Javier Capep, 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 world to identify them. The (COVID-19) pandemic hasn’t stopped this trend, and virtual pitching has successfully overcome it.”

While the venture capital branches of Abu Dhabi’s Mubadala and Canadian pension fund OMERS have a large number of funding circles under their own name or under its VC arm, along with Singapore’s Temasek Holdings, other players are available through VC firms or Straight toes are dipping.

In a deal specific to recent trends, Indian cloud kitchen company Rebel Foods this month raised $175 million in a Series F funding round led by Qatar Investment Authority (QIA).

Along with several other state-owned investors, QIA also invested in a $3.6 billion deal for India’s Flipkart.

After investing $1.2 billion in India’s Jio Platforms last year, Mubadala is eyeing more opportunities in Southeast Asia, its head of enterprise and development Ibrahim Ajami said on a recent company podcast.

“We are focused on expanding into this region (India and Southeast Asia) because it has a very large population, a digital-first population, very mobile, very tech-savvy,” Azmi said.

Graphic: Sovereign Wealth Funds Stampede in Venture Capital

later, bigger

The interest of sovereign funds, among others, new market entrants such as private equity firms, hedge funds and mutual funds has fueled the venture capital boom, raising concerns about rich valuations.

According to CB Insights, the number of unicorns – privately held start-ups with valuations of more than $1 billion – rose 16% between June and September to 842, with the total number expected to break 1,000 by early 2022. does.

The growth also reflects in part for more companies opting to stay private for longer periods of uncertainty about the post-pandemic outlook for equity markets.

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

State-owned investors see unicorns as a way to generate massive returns in a low interest rate environment. Data from Cambridge Associates shows that US venture capital outperformed the broader equity market index over three consecutive, three, five, 10, 15 and 20-year periods.

A large proportion of sovereign wealth deals in the US have been worth $100 million or more during 2021, notes Kyle Stanford, VC analyst at Pitchbook.

“As the mega-deal market has evolved, sovereign wealth funds have more opportunities to work large chunks of capital into single deals,” Stanford said.

“These funds are massive, and so for many, small deals don’t offer the returns necessary to make the deal worthwhile.”

Analysts say the record exit prices of venture capital-backed firms are helping to justify heavy investment levels.

That could change if the expected lack of US bond purchases sends ripples through the public markets and dampens appetite for initial public offerings, a popular exit route.

But sovereign funds can best handle that risk, said Will Jackson-Moore, sovereign fund leader at Global Private Equity, Real Assets and PwC.

“The impact on their overall portfolio may be relatively minor because VCs are a high-alpha, high-risk part of their overall strategy,” he said. Because they have larger pools of capital, he said, “they are in a better position to take the risk”.

Graphic: Sovereign wealth funds accelerate late-stage venture capital deals,

Editing by Jan Harvey

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