Why sovereign wealth funds are pouring billions into tech firms

Asia’s sovereign wealth funds like Malaysia’s Khazanah Nasional Bhd have been increasingly buying into more tech firms, mirroring the global trend

PUBLISHED : Tuesday, 06 June, 2017, 8:00am
UPDATED : Monday, 04 September, 2017, 11:51am

Today, Malaysia’s Khazanah Nasional is among the most active sovereign wealth funds in the world when it comes to technology investments, together with funds such as Singapore’s GIC, Temasek Holdings and China Investment Corp (CIC). It’s a big turnaround from just 10 years ago, when close to 90 per cent of Khazanah’s holdings and investments were in Malaysian companies.

Khazanah, which means “treasure” in Malay, only made its first big direct technology investment in China’s Alibaba Group in 2012. According to Khazanah managing director Tan Sri Azman Mokhtar, the fund’s discovery of the Chinese e-commerce giant was by chance, and came only after getting a drubbing on an investment in an Alibaba competitor.

“Some years back, we had made a very good investment in a brick-and-mortar retail company, Parkson – we had 10 per cent in this [department store operator] and we made fantastic returns,” Azman says.

Excerpts of Q&A with Khazanah Nasional managing director

“Then suddenly, the returns dropped off the cliff. I asked my people what was happening. Turns out, we were getting killed by this company we had never head of at the time called Alibaba. People were going online [to shop] and everything moved so fast.”

In 2008, Khazanah Nasional sold off its Parkson Retail Group Stake and later invested over US$400 million (HK$3.11 billion) in Alibaba in 2012 and 2013, ahead of the Chinese company’s initial public offering in 2014.

“Through Alibaba, we made a billion dollars for the Malaysian people, and Alibaba was our first tech investment,” Azman says.

“We’ve since re-channelled some of that money to over 20 tech investments around the world as well as in Southeast Asia, such as in Singapore gaming company Garena.”

Khazanah now counts Hong Kong-based WeLab (valued at over US$1 billion in 2016), an online lending platform, as well as UK visual search start-up Blippar among its technology investments. It poured US$192 million into travel fare aggregator platform Skyscanner in January 2016, but later cashed out when the Edinburgh-based company was sold to Chinese online travel giant Ctrip in November.

“Technology and innovation is a very important part of our portfolio – percentage-wise it may not seem big, but we have big names in there, like Alibaba and Palantir, which is probably one of the world’s largest big data companies,” says Azman. Tech and innovation make up about four per cent of the fund’s US$33.5 billion portfolio.

According to data by venture capital database CB Insights, the trend of sovereign funds betting on technology investments is on the rise.

Turns out, we were getting killed by this company we had never head of at the time called Alibaba.
Tan Sri Azman Mokhtar, Khazanah managing director

In 2015, sovereign wealth funds invested US$2.2 billion globally in private tech companies, while in 2016, that number climbed to US$12.6 billion. In Asia, the sovereign wealth fund that invests most actively in technology is Temasek, which distributes dividends solely to Singapore’s Ministry of Finance. Temasek’s technology, media and telecommunications investments make up about 25 per cent of its portfolio.

As the valuations of private technology start-ups skyrocket, sovereign wealth funds increasingly see such opportunities as viable means of investment, according to Marcelo Ballve, research director at CB Insights.

“Like other investors that invest across asset classes, sovereign wealth funds have recognised that as companies stay private longer, they may have to invest further upstream in order to catch some of the appreciation in securities that may happen pre-IPO,” he says.

Singapore’s sovereign wealth fund invests in China’s co-working space start-up 5Lmeet

Temasek, GIC and Khazanah all have stakes in Alibaba Group, and the company’s logistics affiliate, Cainiao. Khazanah holds a 0.2 per cent stake in Alibaba, while GIC and Temasek last June bought a combined total of US$1 billion in Alibaba stock.

Alibaba owns the South China Morning Post.

Home-sharing start-up Airbnb has also seen investments from Temasek and CIC, and China’s recent bike-sharing craze has also led Temasek to put an undisclosed amount of money into China’s Mobike, one of the two leading bike-rental companies battling for market share in China. Mobike has raised over US$300 million since the beginning of 2017.

“Temasek is principally an intrinsic value investor,” says a Temasek spokesperson. “Our new investments in TMT [telecommunications, media and technology] reflect the opportunities we see in companies that present long term growth potential, both regionally and globally.”

But direct investments are also a financially attractive option for sovereign investors to invest at very low or no cost, thereby boosting their return prospects, according to PricewaterhouseCooper’s Sovereign Investors 2020 report.

“There is a general trend for sovereign wealth funds, to look for opportunities to invest directly or more commonly co-invest with a private equity general partner,” says David Brown, Greater China private equity leader at PricewaterhouseCoopers Hong Kong and mainland China. “This is mainly because they don’t pay any fees on the co-investment part.”

There is more to the business of investing in technology than just attractive returns, however.

Michael Maduell, president of the US-based Sovereign Wealth Fund Institute, says that sovereign investors are investing in technology as a means of learning about new business models and facilitating the exchange of information.

“Imagine if you were able to discover a [tech] company with a measure of success, you could take that technology and bring it to Asia – this transfer of ideas is a good investment because you’re entering a whole new market,” Maduell says.

“Asian wealth funds have a much deeper statistical benchmark in direct transactions for technology; they’re the leaders when it comes to technology investments, especially when compared to Gulf funds, which still prefer focusing on traditional investments such as real estate.”

Imagine if you were able to discover a [tech] company with a measure of success, you could take that technology and bring it to Asia...
Michael Maduell, Sovereign Wealth Fund Institute

He adds that wealth funds typically invest for the long-term and can hold out for much longer than any other type of investor, such as venture capital funds. This also makes sovereign wealth funds an attractive investor for technology companies.

Khazanah’s Azman believes that part of the fund’s role is also to back entrepreneurship initiatives in Malaysia, and find ways to work with entrepreneurs.

“I think we’ve worked out an equal system, where both [entrepreneurs and state-owned companies] can coexist, compete sometimes, and work together,” he says.

Earlier this year at the Global Transformation Forum in Kuala Lumpur, Azman expressed interest in working with Singapore-based ride-hailing company Grab, founded by Malaysian Anthony Tan, to combat congestion problems faced by drivers commuting from Singapore to Malaysia and vice versa. However, even as wealth funds such as Temasek and Khazanah invest in the hottest technology start-ups of today, these same funds are also keeping their eyes open to the possibilities of truly long-term, game changing technology.

Earlier this January, Alphabet Inc, the parent company of search engine giant Google, sold a minority stake of its life sciences subsidiary Verily for US$800 million to Temasek Holdings. Verily is currently developing a disposable glucose monitoring device as well as autofocus contact lenses for far-sightedness.

But perhaps the most explicit example is from Khazanah Nasional, which has set aside a portion of its funds for what it calls “Portfolio X” – investment bets in long-shot, world-changing technology. One such investment is in Canada-based nuclear fusion power company General Fusion, whose executives reckon that their technology could result in commercially viable nuclear fusion power – the so-called Holy Grail of clean energy production.

Could Canadian fusion power be in play by 2030?

It’s a truly long-shot investment. Work on nuclear fusion power, which fuses atoms rather than splits them to create emission-free, near-limitless electricity, has been going on for decades. The engineering challenges are extraordinary, but success would overturn a market worth trillions.

“It is a risky investment, but if this technology breaks through, my god, it will be revolutionary,” says Azman. The fact that such an investment would possibly render Khazanah’s largest holding, Malaysia utilities company Tenaga Nasional, obsolete, is not lost on Azman.

“That may be years away, or it may not happen. We could lose money, maybe 10 to 15 million dollars, but it’s important [to still invest].”