Page 1 of 3

In a rare embrace of modernity for deeply conservative Saudi Arabia — which faced violent clashes after the introduction of television 50 years ago and still doesn’t allow women to drive — Deputy Crown Prince Mohammed bin Salman revealed last summer that the kingdom’s future will be digital. Prince Mohammed, the brash young face of the House of Saud and chair of the country’s Council of Economic and Development Affairs, boarded a private jet to California in June to mingle with Silicon Valley whiz kids and the venture capital gods who can make or break them. Swapping his traditional thobe for a pair of blue jeans and a blazer, the grinning 31-year-old posed with Mark Zuckerberg for a photo shoot at Facebook’s headquarters in Menlo Park. Just a few weeks earlier, Saudi Arabia’s Public Investment Fund had broken the record for the all-time biggest single investment in a venture-backed company when it cut a $3.5 billion check to Uber Technologies.

PIF may be one of the most aggressive state-owned investors in tech these days, but it’s not alone. A number of sovereign wealth funds, their portfolios hobbled by years of heavy investment in low-yielding bonds, have been plowing billions into new technologies and start-ups, hoping to bag the next Facebook. According to data from Institutional Investor’s Sovereign Wealth Center, these government-owned investment funds poured nearly $7 billion into private technology companies in 2016, shattering their previous record of $2.5 billion, set in 2014. But the Uber investment raises the question of whether PIF ­— and investors like it — are in over their heads.

Saudi cash took the unicorn club (venture-­backed private companies valued at more than $1 billion) to new heights when Uber’s valuation topped $68 billion last June. But shortly after that news broke, the San Francisco–­based taxi app rode into a maelstrom of controversies: CEO Travis Kalanick got caught berating an Uber driver in a viral video, hundreds of thousands of users staged a boycott over Kalanick’s support of President Donald Trump, a former employee published an account of sexual harassment, and the company continues to face an exodus from key management positions.

Uber’s troubles are a bad omen for a market that pundits and soothsayers have been calling a bubble. The number of venture-­backed companies worth $1 billion or more soared from 45 in January 2014 to 154 as of December 2016, according to data from the Wall Street Journal. As unicorns multiplied at a speed that would put rabbits to shame, sovereign wealth funds, which collectively manage about $6.5 trillion, emerged as a promising source of long-term private capital. But some experts question whether the funds have the technical know-how to avoid getting burned in today’s frothy technology markets.

Long considered a trailblazer and role model in the sovereign community for both its prudent approach to direct investing and its tech savvy, Singapore’s sovereign wealth fund GIC, which holds about $354 billion, according to Sovereign Wealth Center estimates, decided years ago to devote special attention to the risks and opportunities arising from the breakneck speed of technological adoption and innovation across all sectors, from health care to energy to manufacturing.

“It’s increasingly hard to categorize which are technology companies and which are not,” says Lim Chow Kiat, GIC’s chief executive and group chief investment officer. “To the extent the traditional definition of ‘technology sector’ is still relevant, we look at it as comprising the entire chain, from start-ups to established industry giants. There are strong linkages amongst the firms at various stages, but the key is not in top-down allocation but bottom-up, name-by-name selection.”

Over the past decade state-owned investors have pumped $25.7 billion into direct technology equity investments, with more than 80 percent of that total coming in since the start of 2014. GIC and its sister institution, Temasek Holdings, accounted for about two thirds of those investments, committing $7 billion and $10.2 billion, respectively, since 2006.

Though publicly listed tech companies typically have received the lion’s share of sovereign dollars, last year marked a significant turnabout, with private market investments accounting for more than 84 percent of the total. Sovereign funds have been known to err on the side of risk aversion, but lately these institutions have been allocating more to high-risk start-ups and later-stage growth companies, popping up as anchor investors in pre-IPO funding rounds — sometimes even taking the lead. Robert Nelsen, co-founder of ARCH Venture Partners, actively tries to recruit sovereign wealth funds into earlier rounds because they’re prone to buy and hold up to and through an IPO.

“Instead of thinking about how to sell after the IPO, they’re thinking about how to buy more,” says Nelsen, who specializes in biotechnology. The life sciences segment, including biotechnologies and medical devices, attracted 11.5 percent of sovereign funds’ direct technology spending in 2016. Mobile companies received a little over half thanks to Saudi Arabia’s investment in Uber, which accounted for 43 percent of the total. Otherwise, Internet companies would have taken the lead, with nearly $2 billion deployed in 13 investments. The remaining $1.1 billion was divided among software, hardware, and consulting companies. About $200 million went to online and mobile financial technology companies.

Biotech has been a natural fit for large sovereign wealth funds because the lab work involved typically requires a larger amount of capital up front than start-ups in other industries need. Because these institutions manage tens of billions of dollars, Nelsen says, they usually won’t even consider an investment opportunity of less than $50 million. “If you’re a sovereign wealth fund, a $10 million check is immaterial,” he says. “It has to be a reasonable amount of capital that can reasonably be put to work in a company to have an impact.”

The challenge of investing at scale is one of the biggest reasons some sovereigns are eschewing venture capital funds in favor of direct investing. Venture capital as an asset class is tightly constrained by the size and number of start-up companies available. Moreover, many of the top-performing venture firms stopped taking on new limited partners years ago. When Bessemer Venture Partners was raising its most recent, $1.6 billion, fund in 2015, partner Ed Colloton says, there was no need to market the fund beyond the firm’s existing investors, which are mostly foundations, university endowments, and family offices. “You’re not going to raise a bigger fund, so everybody just comes back to the table and reups for the new one,” he says.

Taking matters into its own hands, Saudi Arabia’s PIF announced in October that it would put a stunning $45 billion toward the creation of a technology fund run by Japanese telecommunications giant SoftBank Group Corp. Despite the kingdom’s vast oil wealth, that’s not exactly pennies for PIF. Originally created as a development fund to divert a portion of Saudi Arabia’s oil money into strategically important industries and projects, the fund managed $157 billion in assets as of June 2016, mostly in domestic stocks and loans to local businesses.

The fund, which started in 1971 but until recently had little or no international visibility, emerged as the linchpin in Prince Mohammed’s economic reform agenda to wean the country off its dependence on hydrocarbons. Under new leadership PIF reengineered itself before taking the international stage in a full-blown tech offensive. It has since received a $27 billion transfer from the kingdom’s central bank, the Saudi Arabian Monetary Agency, as well as the kingdom’s ownership stake in the world’s biggest oil producer, Saudi Arabian Oil Co. Saudi officials insist the latter could be worth as much as $2 trillion, but that’s all tied up until the company’s planned IPO — if and when that happens.

In November, PIF dumped half a billion dollars on Noon, an online shopping website under development in Dubai that aspires to be the of the Middle East.

But in a not too shocking twist, it turns out Amazon also aspires to be the Amazon of the Middle East: The U.S. e-commerce behemoth reached an agreement to acquire, an established online marketplace operated out of Dubai, for more than $650 million in March.

The development underscores just how unpredictable and cutthroat the tech business can be — and just how bold Saudi Arabia’s PIF is for throwing a quarter of its current assets behind the imperfect science of technological disruption. “Historically, it’s always been hard to judge which companies are going to make money,” warns Colloton, who chairs the investment committee at Bessemer, a top-performing venture firm. “This business is not for the faint of heart.”

For anyone keeping tabs on sovereign wealth funds, Saudi’s investment in Uber felt like déjà vu. Two years before PIF arrived on the scene, the Qatar Investment Authority, which manages $338 billion by Sovereign Wealth Center estimates, raised eyebrows when it wrote a nine-digit check to Uber in 2014, for a $40 billion valuation. Founded in 2005, QIA had a reputation for hoarding glamorous hotels and luxury brands but relatively little experience identifying innovations outside its high-end comfort zone.

Single Page    1 | 2 | 3