Sovereigns and VC: An eye on the future

Future Fund is Australia's largest institutional investor and Atlassian is the country's biggest start-up success story. The former got exposure to the latter in 2010 - five years before the company went public - but not through an Australian venture capital firm. Future Fund's portfolio GP was Accel Partners, which initially invested $60 million in Atlassian, made a partial exit before the IPO, and now holds a stake in the company worth more than $600 million.

The sovereign wealth fund's other venture capital relationships have delivered early access to the likes of Uber, Didi Chuxing, Pinterest, Airbnb and Snapchat. These are the highlights of an early-stage portfolio worth more than A$2 billion through fund-of-funds, direct fund investments and co-investments, Future Fund CIO Raphael Arndt said earlier this year.

As of June, the group had total assets of A$122.8 billion, of which 10.4% was in private equity. And of that A$12.8 billion, just under half was deployed in venture capital and growth equity strategies. Thanks to this approach, it is almost certainly one of the most progressive sovereign wealth funds globally in terms of addressing innovation.

Writing in Future Fund's annual report, Steve Byrom, head of private equity, said that the asset class (and VC and growth equity in particular) has never been more important because it offers access to an innovation cycle largely uncorrelated to the challenging global economic and market environment. "We believe we are in the midst of a multi-wave innovation cycle driven by empowering the consumer, cloud computing, big data, machine learning and mobile connectivity," he added.

Venture capital in China and India are now on Future Fund's agenda, as are growth equity strategies in both countries - especially where they offer access to areas that are seen as proxies to the emerging middle class. The group's first foray into India has already been reported: it backed the most recent fund raised by India Value Fund Advisors (IVFA), a GP with a track record in consumer and media, infrastructure services and healthcare.

The challenge for Future Fund and any sovereign fund that wants to follow the same path is check size. One solution is to target late-stage rounds for established start-ups that would probably be public by now were it not for the largesse of hedge funds, sovereign funds and mutual funds seeking some private markets alpha. This is what took Saudi Arabia's Public Investment Fund into Uber and Singapore's GIC Private into Flipkart and Xiaomi.

Investing through a fund-of-funds is another option, and it may be particularly attractive to emerging Asian LPs that want exposure to the world's leading VC firms but don't have the local knowledge or networks to secure it. Beyond that lies the separate account, which offers more customization and - depending on the arrangement - places a higher degree of discretion in the hands of the LP.

What Future Fund is said to have fashioned to channel its exposure to IVFA and other small to mid-cap managers in Asia might be termed a separate account-plus. It created a pool of capital, appointed a manager, and then proceeded to populate the pool. The manager offers ideas but Future Fund conducts its own assessments and signs off on any decisions. Flexibility is the key: a mid-market GP may sit alongside a Chinese VC firm set up by ex-employees of a leading domestic internet company, a single LP structure for early-stage deals in India, and a handful of co-investments.

There is no guarantee that more sovereign wealth funds will embrace venture capital wholeheartedly and enduringly - some won't be able to handle the risks, particularly where emerging markets are concerned, and others will flee as soon as they begin to feel the effects of a down cycle. But for those that want exposure to new business models, capable of disruption that extends into other private equity strategies, customization will increasingly be the name of the game.

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• Topics
• Australasia
• GPs
• Future Fund
• Australia
• Venture
• India Value Fund Advisors
• Accel Partners