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Analysis: State investors step up unicorn hunt as valuations swell

  • More investments yr to this point than in all of 2020
  • Mega-deals of $100 million or extra a ‘enormous majority’ in U.S.
  • India, China capturing extra curiosity
  • Clamour into VC raises frothy valuation fears

LONDON, Oct 13 (Reuters) – Sovereign wealth and public pension funds are piling into enterprise capital mega-deals past Silicon Valley even as frothy valuations increase fears of overheating amongst a surging variety of unicorns.

The promise of returns at multiples of fairness markets’ has made enterprise capital more and more inviting for state-owned investors, whereas their deep pockets make them attractive backers for cash-hungry start-ups.

In the primary 9 months of this yr, state-owned investors made $14.9 billion in enterprise capital investments, up from $8.9 billion throughout all of 2020, information from Global SWF confirmed.

Participation by sovereign wealth funds and different authorities funds in U.S. enterprise capital offers by worth reached a five-year excessive as of the top of June, in accordance with PitchBook information.

While the U.S. represented virtually half of all capital flows by sovereign investors into enterprise capital in 2020, it accounted for under a 3rd of the offers seen in 2021, in accordance with Global SWF, with China and India sucking in additional flows to seize 40% of the 2021 whole.

“Technology, as a whole, is everywhere, from food, to transportation, energy to logistics. Now it is seen as a good opportunity to diversify a portfolio,” stated Javier Capape, director of sovereign wealth analysis on 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.”

While the enterprise capital arms of Abu Dhabi’s Mubadala and Canadian pension fund OMERS loom giant in funding circles alongside Singapore’s Temasek Holdings, both underneath its personal title or that of its VC arm, different gamers are dipping toes in by means of VC companies or immediately.

In a deal typical of current tendencies, Indian cloud kitchen firm Rebel Foods this month raised $175 million in a Series F funding spherical, led by Qatar Investment Authority (QIA).

Along with a number of different state-owned investors, QIA additionally invested in a $3.6 billion deal for India’s Flipkart.

Having made a $1.2 billion funding in India’s Jio Platforms final yr, Mubadala is eyeing extra alternatives in Southeast Asia, Ibrahim Ajami, its head of ventures and development, stated on a current firm 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 stated.

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Sovereign funds’ curiosity, together with that of different, newer market entrants like personal fairness companies, hedge funds and mutual funds, has fuelled a enterprise capital growth, stoking worries about wealthy valuations.

The variety of unicorns – privately held start-ups with a valuation of greater than $1 billion – swelled by 16% to 842 between June and September, in accordance with CB Insights, which expects the general quantity to interrupt 1,000 by early 2022.

The rise partly additionally displays extra corporations opting to remain personal for longer throughout a time of uncertainty in regards to the post-pandemic outlook for fairness markets.

While enterprise capital permits state-owned investors to take part in early-stage offers, amongst sovereign funds there was a shift to investing in additional mature start-ups.

State-owned investors see unicorns as a method to generate outsize returns in a low rate of interest surroundings. U.S. enterprise capital constantly outperformed broader fairness market indexes over the three, 5, 10, 15 and 20 yr intervals, Cambridge Associates information exhibits.

An enormous majority of sovereign wealth offers within the U.S. throughout 2021 have been at $100 million or bigger, notes Kyle Stanford, VC analyst at PitchBook.

“As the mega-deal market has grown, sovereign wealth funds have found more opportunities to put huge chunks of capital to work in single deals,” stated Stanford.

“These funds are massive, and so for many, smaller deals do not offer the return necessary to make the deal worthwhile.”

Record exit values from enterprise capital-backed companies are serving to justify hefty funding ranges, say analysts.

That might change if an anticipated tapering of U.S. bond purchases sends ripples by means of public markets and dampens urge for food for preliminary public choices, a well-liked exit route.

But sovereign funds can deal with that danger higher than most, Will Jackson-Moore, international personal fairness, actual belongings and sovereign funds chief at PwC, stated.

“The impact on their overall portfolio can be relatively modest as VC is a high-alpha, high-risk part of their overall strategy,” he stated. Because they’re giant swimming pools of capital, he added, “they are better positioned to take on the risk”.

Reuters Graphics
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Editing by Jan Harvey

People walk in Lujiazui financial district during sunset in Pudong, Shanghai, China July 13, 2021.   REUTERS/Aly Song

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