Sovereign investors are helping fuel billion-dollar funding rounds for emerging-market tech startups, where companies and their backers are fighting for first-mover advantage in the digital space. The aim is to find firms that can replicate the models of Amazon, Netflix and Facebook in the United States - companies that will dominate a young, tech-savvy market.
Sovereign wealth funds (SWFs) have the capital to feed this trend - and the patience to wait. Instead of exposing themselves to a stock market listing, companies simply return to private backers in ever-bigger funding rounds, building war chests to pick off their rivals.
To April 24 this year, SWFs participated in 15 venture capital mega-deals, worth some $10.9 billion, compared with 22 deals worth just $9.75 billion in all of 2017, according to funding database PitchBook. Asian venture capital funding rounds worth $100 million or more reached a total $20.7 billion to April 21, data from research firm Preqin showed. That easily outstripped those in the United States, worth $8.9 billion, and in Europe, worth $1.7 billion.
Asia is attractive because it has fewer established or entrenched companies, said Jeff Schlapinski, head of research at EMPEA, a trade association for private capital in emerging markets: "In the US, you have to go up against Amazon, or Facebook or Google." According to Preqin, 14 of 2017's largest 20 venture capital deals took place in Asia, mainly China and India. Among them were a $4 billion mega-funding round for China's ride-hailing firm Didi Chuxing, backed by Abu Dhabi's Mubadala Capital and Japan's SoftBank Group.
Singapore's sovereign investors Temasek and GIC have also made a splash. Last October, GIC took part in a $4 billion round for Meituan-Dianping, China's largest online services provider . Temasek invested in a $1.5 billion February funding round for Indonesian ride-hailing firm Go-Jek. One driver is Asia's expanding middle class, with near universal access to smart devices and technology. "Significant consumers with capital have never been reachable more easily and affordably," said Chris Schroeder, founder of Next Billion Ventures, a firm focused on emerging market hi-tech businesses.
CONSOLIDATION Given the competition for this market, the canniest investors are now seeking ways to consolidate their holdings. "There comes a time when investors look at the really fierce competition between companies and can see better prospects if the companies were to merge or combine their efforts," said EMPEA's Schlapinski.
In April, the Financial Times reported that SoftBank planned to move more than $20 billion of its ride-hailing stakes in Uber, Didi Chuxing, India's Ola and Singapore's Grab into the $93 billion Vision Fund. This tech-focused joint venture with Saudi's Public Investment Fund (PIF) has also just led a $1.9 billion funding round for Chinese truck-hailing service Manbang .
Ride-hailing is hotly fought over in Asia. Didi Chuxing absorbed Uber's China operations in August 2016, and Uber's Southeast Asia business was sold to Grab in March after a costly battle. China's saturated bike-sharing market has also been consolidating, with Meituan-Dianping buying Mobike for $2.7 billion in April.
The involvement of SWFs allows early stage venture capital investors a way to exit without listing. But their sheer scale means conventional players have to raise ever-bigger funds to compete, or risk getting squeezed out of the market.
"SWFs are running valuations up because they enter with more money. That's a problem when there is more money than startups," said Javier Capape, a director at the Sovereign Wealth Lab research centre in Madrid.
"The industry is saturated with capital right now," agreed Felice Egidio, Preqin's head of venture capital products. "But all this accessibility to 'loose capital' is slowing down the process of the potential exit _ eventually there has got to be some sort of market correction."
Success is still determined by how these companies fare in an initial public offering. Didi Chuxing is reportedly in talks about floating this year at a valuation of up to $80 billion . Meituan-Dianping is also said to be eyeing a listing.
But Uber looks unlikely to list this year after numerous problems. And if companies don't list, each additional prospect becomes harder for SWF deal origination teams to sell to their investment committee. "Everyone is in the boat, but we need to see the boat reach the harbour," said Markus Massi, a senior partner at The Boston Consulting Group. "You want to see if the initial investments pay off, and IPOs are needed to confirm the trend. If you have several delays, then risk appetite will be reduced.
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