It’s time for India to establish at least over $25 billion sovereign fund, one that is sector-agnostic and run by capable investment professionals
By Srivatsa Krishna
Size does matter, and global sovereign wealth funds (SWF) are one measure of any country’s economic muscle. Norway, which has the world’s largest SWF at about $1.4-1.8 trillion, owns, on an average, 1.5% of every listed company on Earth. Imagine what will happen to the global capital markets if Norway sneezes. Or if Saudi’s Public Investment Fund (PIF), which is one of the world’s largest investors in Softbank’s $100-billion Vision Fund, or the UAE’s ADIA or Mubadala were to catch a cold? If they caught a cold, the attendant infection could shake up the global markets.
A brand-new book The Hunt for Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy, by Winston Ma, China’s version of Warren Buffet (along with Lei Zhang and Kai-Fu Lee who are among the smartest investing troikas on the planet today), is a remarkable odyssey analysing the architecture of SWFs. In this context, perhaps the most interesting dynamic playing out today is between the US and China over data and algorithm. Apple and ByteDance/TikTok have proven to be completely pandemic-proof. Further, Zoom and TikTok have been the top two downloads in the world even during the deep slowdown caused by Covid-19. Apple and TikTok are the only two apps on the planet that have user data from both these countries (and India) and the algorithm is trained on data from all three! So, the US and China, each is claiming national security considerations for protecting their data and algorithm, respectively, which is a puzzle intermixed not just in code but also by geopolitics. It would be fascinating to see how it plays out as each country tries to claim sovereignty over code and data.
Ma argues, more through correlation than via causation, that SWFs are responsible for the manufacture of global unicorns and the book has an unbelievable array of examples of investments to prove this point. The term unicorn (to signify the internet equivalent of the one-horned mythological creature) was coined in 2013 when there about 40 of them. By 2019, this number had gone by 10X—companies with a valuation of over a billion dollars, not always profitable but representing myriad sectors and the lifeblood of innovation as a whole. Further, what is the ‘secret sauce’ that enables SWFs to manufacture unicorns is not as well analysed as one would have expected from Ma, but instead it is more descriptive.
SWFs, which have the money of pension funds, insurance funds, etc, usually look for stable long-term returns to match their liabilities profile. Ma shows how, of late, they too have been enticed by the seductive allure of the internet sharing economy, and instead of being passive allocators of capital, have now become direct proactive investors. Once they discovered the futility of paying double management fees by going through a fund of funds vehicle, and the greater impact by investing directly, almost every one of them is now a direct investor in large internet economy companies. Ma brilliantly chronicles the ‘hidden gems’ in terms of investments done by SWFs and teases out the geopolitical and other dynamics beneath them. He argues correctly that ANT Financial’s IPO valuing it at over $300 billion was under-written by the Wall Street and bought into by several US funds! In the final analysis, money triumphs Trump’s politics. As per reports, retail investors were splurging over $3 trillion in frenzied bids for its stocks.
The book chronicles how SWFs, which once were content with investing in real estate and infrastructure, are today in the blood and sinews of the world’s digital infrastructure and are building it in every country around the world. And these cannot be ignored. What does not come shining through is why SWFs, which are often content with just 7-8% equity returns (as compared to traditional venture capital that looks at 15-24% returns), are often the lenders of last resort and not first. And how they entice top-class talent to work for them despite not paying them any ‘carried interest’, which is the main incentive for any equity investor in any fund.
The one stellar difference between traditional growth capital and SWFs investing is the dominant role of the host political country and its own political dynamics. China, through its aggression on India’s borders, has shot itself in the foot by the government’s well thought out move to strike where it hurts them the most (and India the least)—the ban on apps. China’s national laws mandate that all companies have to hand over their data and source code when demanded by the government. One is fairly certain that the financial data of most Indians, courtesy Paytm thanks to its dominant Chinese ownership, would already be in their servers.
One final thought. It is time for India to establish its over, say, $25 billion sovereign fund, one that is sector-agnostic and run by capable investment professionals whose sole purpose would be to get top returns and plant the India flag around the globe. It should be run not by traditionally risk-averse civil servants, but by investment professionals with an appetite for picking up global assets, which is yet another way of spreading India’s soft and hard power around the world. The Modi administration must look beyond the NIIF and set up a proper India equivalent of a Temasek or an ADIA that invests directly overseas. Imagine if India owned a part of some of the foremost assets around the world, commensurate with its own global power reckoning?
Ma’s book is a timely reminder to the world of the $30-trillion prize at stake—the total size of the world SWFs—and what is all is at stake both financial and geopolitical, before one gets to it. The book is timely, exhaustive, incisive and unputdownable. It is perhaps the only one of its kind on the subject of SWFs, and but for some minor flaws, is a compelling read.
The author is an IAS officer. Views are personal