In July 2021, the food delivery company Zomato went ahead with its planned Initial Public Offering (IPO) in the Bombay Stock Exchange, becoming India’s seventh-largest IPO of all time. The company raised the US $564 million, and its anchor investors included sovereign investment funds like ADIA (UAE), CPP (Canada), OMERS (Canada), and GIC (Singapore). Before the IPO, the company had raised US $2.1 billion through private financing rounds, where the Singaporean government fund Temasek was estimated to have invested the US $100 million.
Zomato was not the only e-commerce giant in India that counts major sovereign funds as its key backers. In the same month, Flipkart raised US $3.6 billion with a new funding round that included ADQ (UAE), CPP, GIC, Khazanah (Malaysia), and QI (Qatar). According to Global SWF data, the new financing consolidated Flipkart’s position as India’s largest tech startup, with an implied valuation of US $37.6 billion.
As illustrated by Zomato and Flipkart, the pandemic, in many ways, has revealed and accelerated powerful trends that were long at work, and that has only now come to wider attention. Amongst these trends are the rapid penetration of e-commerce in the emerging markets, and the little-known yet potent rise of sovereign wealth funds (SWFs) as the new venture capitalist (VC). To provide some context, here is a quick question: Who holds the power in financial markets? For many, the answer would probably be the large investment banks, big asset managers, and hedge funds that are often in the media’s spotlight. But more and more, new groups of sovereign investors, which includes some of the world’s largest sovereign wealth funds, government pension funds, central bank reserve funds, and other sovereign capital-enabled entities, have emerged to become the most influential capital markets players and investment firms, with the US $30 trillion in assets under management.
Sovereign investors have come a long way in the decades since the Global Financial Crisis (2008) when they poured billions—too early as it turned out—into the titans of finance like Citibank, Morgan Stanley, Bank of America, and were briefly portrayed as the saviors of capitalism. After learning costly lessons from their 15 minutes of fame, these new giants of finance have emerged as savvy, early investors in the digital transformation of the world’s economy. But it is in the digital world that their impact is most felt. Sovereign investment funds are the new, powerful venture capitalists. Their ample resources, long time horizon, as well as their need to diversify globally and by sector, have helped to transform the private venture capital market for digital companies. They have shaken off their traditional, passive investor roles and stepped in as the vanguard of the digital transformation we are now witnessing. Their combination of ample cash and canny investing has enabled the rise of the “unicorns”: Private companies, digital startups, valued at more than the US $1 billion each. Given the sheer size of their investments, they are the “unicorn makers”. Their capital has fuelled the rise of this once-rare breed, backing the likes of Alibaba, AirBnb, JD.com, Tesla, Uber, WeWork, and the well-known unicorn-maker, the US $100 billion Softbank Vision Fund.
The advent of stay-at-home orders and social distancing has only accelerated the trend toward highly digitalized lives. Instead of coming to the rescue of the incumbents, in the current crisis, they have ridden the unicorns to greater success.
In a further departure, the sovereign funds are systematically investing in the innovation ecosystem to boost their domestic economies. This is an ongoing, powerful trend spanning continents. These funds see tech investments as a way to support economic activity and job creation at home, while simultaneously achieving commercial returns from new businesses. For example, one of the goals of Turkey’s sovereign fund is to develop the domestic entrepreneurial economy and become the “investment gate of Turkey”. The Public Investment Fund (PIF) of Saudi Arabia and the UAE’s Mubadala fund, the main backers of the Vision Fund, are probably the most prominent examples. This is best illustrated by the US $500 billion PIF has committed to founding the futuristic Neom City, featuring flying taxis and a nightly artificial moonrise on a site 33 times the size of New York City. And some sovereign funds further attract foreign capital, especially from sovereign funds in other countries. Concurrently, we note that Indonesia’s government is setting up its new sovereign wealth fund known as the Investment Authority Indonesia (IAI). Jakarta pledges the US $5 billion to the fund that it hopes will in turn attract the additional US $15 billion from abroad. The UAE, Japan’s Softbank, and the US International Development Finance Corporation (DFC) have already been lined up to invest in the fund, according to Indonesian officials. The IAI will initially focus on infrastructure in the country—both physical and digital, which would make up for the limited financing capacity at home, according to President Joko Widodo.
The future will see two powerful sovereign fund-driven trends in the digital economy. On one hand, global sovereign funds will continue rushing to Silicon Valley, China, and other world innovation hubs, such as India, to join the unicorn hunt and capture a piece of that future. On the other, more sovereign funds are taking on domestic economic development mandates, especially in emerging regions such as Africa, Latin America, South Asia, and Eastern Europe. Experienced in the global hunt of unicorns, the sovereign funds will now nurture the technology startups in their backyards.