Copyright © 2021 IFSWF Ltd.
In the wake of the COVID-19 pandemic, sovereign wealth fund direct investments reached a record number in 2021.
Having already deployed a record amount of cash to support local economies or make opportunistic investments in volatile international markets in 2020, sovereign wealth funds’ direct investments rose again in 2021, reaching $71.6 billion, up from $67.8 billion in 2020. The number of transactions highlights the frenzy of investment activity: it jumped from 316 in 2020 to 429 in 2021, a 50% increase year-on-year, and a 60% increase in the average number of deals in any of the previous five years.
Source: IFSWF Database, 2021.
Sovereign wealth funds are not isolated from capital markets, and their activity is the result of a broader trend as global mergers and acquisitions reached new records in 2021. According to the advisory firm PwC, publicly disclosed deal values reached all-time highs of $5.1 trillion – including 130 megadeals with a deal value greater than $5 billion – 57% higher than in 2020 and smashing the previous record of $4.2 trillion set in 2007. Intense demand for technology, as well as digital and data-driven assets triggered by the pandemic in 2020, exploded in 2021.
In 2021, sovereign wealth funds not only invested in digital technologies but also put more capital into hard assets. In a partial reversal of the trend over the last two years, sovereign wealth funds directly invested $15.5 billion in infrastructure, almost double the $8.1 billion in 2020, and the highest amount invested since the IFSWF Database began. In July 2021, the Abu Dhabi Investment Authority (ADIA), published a spotlight on infrastructure which explained how the Emirati investor was purposefully seeking to increase its exposure to certain growing subsectors, such as renewables and digital infrastructure while pursuing fewer but larger acquisitions and managing the overall number of positions in their portfolio. Many other sovereign funds have been following a similar path.
Asian Consumers and the Global Digital Revolution
In 2020 and 2021, the COVID-19 pandemic accelerated several investment themes that had been developing for some time. As Australia’s Future Fund highlighted in a position paper: “A new investment order”, sovereign wealth funds are facing new challenges and are adapting to them.
In this paper, the Future Fund identifies climate change, deglobalisation, demography and technological breakthrough as increasingly important themes in the post-pandemic environment. As can be seen from the chart below, sovereign funds invested mainly towards Asian consumers’ businesses, which received the highest amount of capital across regions and sectors in 2021: $8.9 billion and American technology firms, which received the highest number of sovereign wealth fund direct investments: 65. Indicating that they are tapping into Asian middle classes and American technological breakthroughs.
In 2021, sovereign wealth funds invested 12% of the total capital deployed in Asian consumer companies. They deployed $8.9 billion across 38 investments mainly in companies tapping the e-commerce boom.
Source: IFSWF Database, 2021.
For example, in October 2021, ADIA led the pre-IPO fundraising of GoTo Group – the largest digital and consumer platform in Indonesia – with a $400 million investment. The transaction was the first principal investment by ADIA’s private equities department into a technology business in South-East Asia and its largest investment into Indonesia to date. ADIA joined a global list of existing GoTo investors that includes Singapore's government investor Temasek Holdings, Alibaba Group, Facebook, Google, KKR, PayPal, Sequoia Capital India, SoftBank Vision Fund 1, Tencent and Warburg Pincus.
Today, the consumer sector is so intertwined with technology, that sovereign wealth funds invested a third of the publicly disclosed capital they have deployed in direct investments ($25 billion) across these two sectors, a total of 227 transactions, representing over half of the dealmaking in 2021.
The Importance of Technology
A decade ago Marc Andreessen, co-founder and general partner of venture capital firm Andreessen Horowitz, predicted that software would eat the world in an essay for The Wall Street Journal.
This obscure prediction, which could sound esoteric to those not working in technology or venture capital, has been repeated every time that investments, revenues and valuations of software as a service (SaaS) companies have risen rapidly.
The importance of SaaS, cannot be underestimated for sovereign wealth fund investments either, as they have kept on increasing investments in this subsector, every year since 2015. In 2021, they invested $6.4 billion globally or almost 10% of all direct investments, across 79 deals. North America attracted 36 deals and $3.2 billion alone. These investments are not only in early-stage startups but also in growth equity and leveraged buyouts. In December, for example, Abu Dhabi’s Mubadala Investment Company, announced it co-invested in Medallia, a human resources management software firm, alongside Thoma Bravo, a leading private equity firm specialising in software investments.
Source: IFSWF Database, 2021.
The Qatar Investment Authority (QIA) had already invested in the same niche, when it co-led a $270 million investment in Paycor, a provider of SaaS payroll and human capital management software, in January.
As can be seen in the chart above, in 2021, financial technology (fintech) also attracted sovereign wealth funds’ interest, with 40 deals and $2 billion in total value globally, with investors scouting deals globally, including outside the usual markets of the United States, Europe, and Asia. For example, Qatar Holding, a subsidiary of QIA, invested $200 million in pan-African fintech firm, Airtel Mobile Commerce, the holding company for several of Airtel Africa's mobile money businesses in the continent. The transaction valued Airtel Africa's mobile money operations at $2.65 billion on a cash and debt-free basis.
Strategic Funds Keep Pushing Their Home Economies
In the last two annual reviews, we have highlighted a burgeoning trend of sovereign wealth funds investing in their domestic markets. We noted that, since 2015, sovereign wealth funds had doubled their participation in local economies in terms of the number of deals, but they were still struggling to put more capital to work. However, in 2021, sovereign wealth funds invested $14 billion in domestic markets, $1 billion more than in 2020 across 46 deals (down from 54 a year earlier) revealing that these investors are now finding and originating large-scale investments at home. Due to the pandemic, sovereign funds deployed 19% of all capital towards direct investments in their local markets over the last two years, as opposed to an average of approximately 13% in the previous five years.
Source: IFSWF Database, 2021.
Saudi Arabia’s Public Investment Fund (PIF), which invests both domestically and overseas, announced several major projects to develop domestic infrastructure, tourism and real estate industries, among others. In February, it bankrolled the Soudah Development Company (SDC) with a $3 billion initial investment, to lead the development of a luxury tourist destination. SDC will collaborate with the private sector to enhance tourism infrastructure with 2,700 hotel rooms, 1,300 residential units, and 30 commercial and entertainment attractions. In September, PIF took a 25% stake in Emaar, the Economic City (EEC), rolling over $755 million of EEC’s debt. PIF’s strategic investment will aim to create synergies between EEC and PIF’s ecosystem in the real estate, manufacturing, logistics and tourism sectors.