SWFs: The powerful venture capitalists in the "new economy"
Global Investment Insights
with Winston Ma, CFA & Esq.
Adjunct Professor, NYU School of Law
Former Managing Director, China Investment Corporation
Author of China's Mobile Economy, The Hunt for Unicorns and The Digital War
Winston is an investor, lawyer, author and professor in the global digital economy of today. More formally, he currently holds the position of Adjunct Professor at the NYU School of Law focusing on sovereign funds. Prior to that, he spent ten years as the Managing Director and Head of North America Office for China Investment Corporation (CIC), China’s sovereign wealth fund (SWF) with assets under management today exceeding one trillion dollars (US).
With so many exciting developments – and global tensions – in play at the moment which sit at the intersection of sovereign investment funds, cross-border tech investing and digital economy regulations, Winston finds himself back in the midst of capital market for tech investing and making sense of the rapid changes taking place. He has written a number of books relating to these topics, two of which were published in January 2021;
The Hunt for Tech Unicorns – How Sovereign Funds Are Reshaping Investment in the Digital Economy
The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace, a sequel to his 2017 book China’s Mobile Economy.
SWFs are the frontier investors in today’s capital markets. Collectively, they are estimated to have US$30 trillion in assets under management and as a result, wield enormous power in the financial world. Winston’s first encounter with a SWF was during the global financial crisis of 2007-08, when he left Wall Street to join the then newly established CIC. At that time, CIC was a new entrant to global capital markets with little attention given to its activities. In stark contrast to now, where every investment decision made is in the headlines.
*****
Today, SWFs are the new, powerful venture capitalists. They are the “unicorn makers”, fostering the likes of Uber, Alibaba, Spotify, and many more “new economy” start-ups.
*****
Today, SWFs are the new, powerful venture capitalists. They have shaken off their traditional, passive investor roles and stepped into the vanguard of the digital transformation we are all living through. Because of the large size of their investments, they are the “unicorn makers”, fostering the likes of Uber, Alibaba, Spotify, and many more “new economy” start-ups.
*****
Now in China, a new generation of tech start-ups are emerging, which can no longer be simply described as the Chinese versions of Silicon Valley firms.
*****
On the topic of the global digital transformation, we are now seeing two leading innovation centres emerging with different strengths, China in Asia and the US in the West.
During the last few years, Chinese tech companies have already proven their mettle by catching up to global rivals in the smartphone and fourth-generation (4G) technology development process. Now in China, a new generation of tech start-ups are emerging, which can no longer be simply described as the Chinese versions of Silicon Valley firms.
*****
China may soon foster more unicorns than the US, creating exciting investment opportunities for global investors.
*****
Based on the superfast cellular 5G networks, advanced applications of artificial intelligence (AI), blockchain, cloud computing, and big data analytics, Chinese tech start-ups are expected to make major breakthroughs. Together, they form the tech infrastructure of China’s digital economy – dubbed “new infrastructure” in China’s 2020 government report, which can be summarised as 5G iABCD (see figure one). China may soon foster more unicorns than the US, creating exciting investment opportunities for global investors.
The biggest challenge for investors in identifying and capitalising on opportunities is the fact that global capital markets are completely distorted by government intervention, further exacerbated by actions taken in response to the COVID-19 pandemic.
The large policy interventions undertaken by governments to stabilise the global economy are not by themselves a long-term solution. Most emergency spending and lending are at best a liquidity bridge. The resulting low interest rates, debt expansion, and heavy financial market reliance on policy support, however, are leading to large distortions of economic decisions and asset pricing.
Hopefully, we will see more long-term capital from sovereign investment funds being allocated into next generation digital economy infrastructure, which may become a much needed growth driver for the post-COVID global economy.
In recent years, we have already seen SWF taking on domestic economic development mandates, especially in emerging regions such as Africa, Latin America, South Asia, and Eastern Europe. Going forward, they may also act as important investors into digital infrastructure for their domestic economies.
*****
Most emergency spending and lending undertaken by governments in response to the COVID-19 pandemic are not a long-term solution, but a liquidity bridge at best.
*****
Winston left us with some reflections from his career that have served him well in terms of relationship building and learning from peers within and outside the investment industry. He recounted, “in the early years of my career, when I was a Vice President at JP Morgan investment banking in New York, I organised periodic China dinners to bring people of disparate backgrounds, areas of expertise and points of view together on the common theme of China. The dinners were modelled on the salons of the 19th century, inviting bankers, lawyers, journalists, regulators, and businessmen interested in the broad topic of China for evenings of inspired conversation.
The discussion topics were equally extensive as they were provocative, and dozens of friendships came out of the dinners, as well as business partnerships.
I realised that it was a great way to meet new and interesting people whom you would not ordinarily meet and whom you could add to your network – especially in a cross-cultural context.” As the world is becoming interconnected and decoupled at the same time, this is a terrific social/business model to adopt for anyone who is seeking to build new business relationships or cement old ones.
Disclaimer
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
All material appearing in GII’s Global Investment Insights is copyright, reproduction in whole or part is not permitted without written permission from the Publisher, GII.