Digital and technology deals have grown to take a 27% share of deals financed by sovereign wealth funds over the past five years, at the expense of consumer-related deals, says new research by Boston Consulting Group.
The management consultant said in its research, "Sovereign Wealth's Hunt for the Next Unicorn," that the proportion of technology deals as a share of total transactions financed by sovereign wealth funds has grown to an estimated 27% of a total 405 deals in 2017, from 22% in 2012. The number of deals grew to 110 in 2017 from 23 in 2012.
Business, products and services deals remained the highest share of total deals at 28.4%, growing from a 25.2% share in 2012, while health-care-related transactions represented 13.3% of the total, up from 9.7% in 2012. Financial services deals represented 7.7% of the total, up from 6.8%.
However, these areas grew at the expense of other sectors. Transactions relating to consumer products and services financed by sovereign wealth funds represented 13.8% of the total in 2017, compared with 23.3% in 2012. Energy deals took a 6.9% share, down from 7.8%, and materials and resources transactions accounted to 2.7% of the total, down from 4.9% in 2012.
Boston Consulting Group said sovereign wealth funds are also engaging with their deal targets earlier in their growth curves, with some serving as an alternative to an initial public offering. The management consultant said this strategy gives funds "access to technology life cycles that may lead to larger and more rapid returns as well as insights that can inform both their national strategic agendas and the growth strategies of their existing portfolio companies." This can also help these businesses to maintain their valuations "and avoid the volatility and costs of transparency associated with a public listing," said the research.
However, BCG said investing in emerging digital and technology businesses is different from investing in other sectors, requiring "fundamental adjustments to a fund's investment model. To succeed, SWFs need to articulate the value they hope to achieve, adapt their operating model to enable early-stage investing, calibrate the risk-reward thresholds they're willing to accept, and acquire critical skills and expertise," said the research.
BCG added that sovereign wealth funds' lack of deep expertise and low presence in key technology hubs mean early-stage investments are often made through limited partnerships in established venture capital funds. "They then evolve these investments into more direct positions once the digital and technology businesses become classic growth capital plays — situations in which the underlying business model is effectively proven. This approach tends to suit current SWF investment operating models."