​Are Sovereign Wealth Funds Gearing Up to Steal Private Equity’s Thunder in Tech?

January 2018

Sovereign wealth funds, state-owned investment vehicles, are not the principal institutional investors in tech-focused middle-market private equity funds. But this could change soon.

Tech-focused fund managers surveyed in BDO’s Ninth Annual Private Equity PErspective Survey, about 18 percent of all respondents, note that the financial commitments they receive come mostly from pension funds (41 percent) and family offices (36 percent), with about 24 percent coming from a mix of high net-worth individuals, fund of funds, banks, strategics, endowment funds and insurance companies.

However, sovereign wealth funds have been increasingly investing in private equity funds overall, with Carlyle Group co-founder and co-CEO David Rubenstein recently predicting that these investors will replace pension funds as the largest source of capital commitments.

So why haven’t sovereign wealth funds marched en masse to tech funds yet? The answer could be that they are opting to invest directly in tech companies rather than getting that exposure via private equity funds.

In the year up to November 22, 2017, Asian sovereign wealth funds alone invested more than $6 billion directly into tech, $1 billion more than they did during the same period in 2016, according to the Sovereign Wealth Fund Institute’s SWF Transaction Database.

And they invested all over the world, with some of their targets being Chinese internet company Meituang Dianping, Germany-based audio distribution platform Soundcloud, Denmark payment service provider Nets A/S, Norwegian software provider Visma, California-based advertising technology provider Turn Inc., and Ohio-based Vantiv, another payments processing provider.

It will be interesting to see how sovereign wealth funds, which have historically been passive investors, will fare in competing for deals as well as in the managing those investments without the assistance of a private equity middleman. After all, even highly-experienced private equity fund managers with strong track records of acquiring and managing technology companies have seen their own sets of challenges.

For instance, survey respondents say that directly managing tech companies entails challenges such as identifying growth opportunities (42 percent), and finding and retaining management teams (33 percent).

Among the tactics they plan to use to drive valuations upwards are to diversify products and services (96 percent), evaluate cybersecurity risks (95 percent) and implement digital transformation strategies (91 percent).

Still, an overwhelming majority, or 92 percent, of fund managers in private equity firms that invest mostly in the tech space expect the value of their portfolios to increase over the next 12 years.

It remains to be seen if sovereign wealth funds can efficiently switch gears from finding the best funds to identifying optimal acquisition opportunities, managing portfolio companies directly and then exiting them for a private equity-like return.

The other question is: will the investment in ramping up the infrastructure necessary to invest directly be less expensive than paying fees to a fund manager?