SWF Investors set to embrace VC Funds post Covid-19

As countries in the GCC begin to re-open their economies, as well as their borders and airports, it is becoming apparent that the effects of the coronavirus-induced lockdown will be severe and long-lasting. Even the most optimistic analysts estimate that at least 10% of the 9.9 million population of the United Arab Emirates (largely made up of expatriates) are likely to relocate permanently to their countries of origin over the course of the next three months. Emirates, the UAE’s flagship airline, has already been forced to lay off 780 pilots and over 7,000 cabin crew members with redundancies expected to continue unabatedly in the near future (the final toll is expected to be around 30,000 employees).

Unsurprisingly, the aviation and hospitality giants of the region are not alone in their struggle. Many Middle East SMEs are facing a sudden and significant drop in sales, supply chain disruption and cash flow constraints as large corporates continue to delay supplier payments in an effort to conserve cash. In the UAE, the SME segment accounts for around 60% of non-oil GDP and employs around 90% of the private workforce. In an effort to arrest the slide, the UAE Central bank announced an AED 100 billion stimulus plan in March as a means of offering support to corporates and individuals overwhelmed by a liquidity and solvency crisis, instigated by both the Covid-19 outbreak and simultaneous collapse in oil prices. The scheme includes an injection of AED 50bn from Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and AED 50bn funds from the banks’ capital buffers.

In Saudi Arabia, a SAR 50 billion stimulus package of support to the private sector was unveiled by the Saudi Arabian Monetary Authority (SAMA), with a focus on SMEs. Concrete measures include deferring their loan payments by six months with immediate effect, granting them concessional loans from banks and financial institutions to successfully maintain operations and employment rates.

These and other GCC salvation packages are expected to be funded, in part, by the sovereign wealth funds who are now channelling some of their billions invested overseas back home to assist with the counter-recession measures being implemented. Some have suggested that a strategic investment fund be set up with SWFs acting as anchor investors and guarantors to other lenders, giving the banks a higher degree of confidence when lending to distressed SMEs through the fund.

Although the Institute of International Finance maintains that SWF investment activity may slow down in some asset classes, it is also possible that the current economic climate of lower valuations and real innovation presents an opportunity for VC firms to secure a larger share of the dry powder available, which is now at a record high. In an interview with Arab News, Dubai-based Global Ventures founder Noor Sweid estimated it to be around USD $189 billion.

VC firms such as Noor’s are very optimistic about the future of sectors which have grown in value and representation since the start of the pandemic – namely health technology, education technology, e-commerce and food delivery, robotics and automation.

It is precisely these innovations in digital and remote technology over the past decade which have proved critical in enabling governments and health authorities to implement the best possible remedy amid a global pandemic and have people stay home. Technology is now helping to mitigate the impact of the current situation by helping employees and students be productive from remote locations, enabling the home delivery of consumer goods and food, facilitating quicker testing, lowering the risk of further infections through contact tracing and accelerating the development of treatments and potentially vaccines. Even after the crisis, the venture capital ecosystem which supports emerging technologies will be key to preventing future pandemics.

As Paul Condra of PitchBook writes; life sciences technologies, such as venture-backed start-up Bluedot, have so far played a critical role in both spotting and dealing with the outbreak of Covid-19 in China. More efficient testing has also been made possible by larger pharmaceutical companies such as Roche. Greffex, a US-based firm also backed by venture capital has managed to produce a vaccine which is in its testing phase but several other firms focussing on innovative immunotherapy are also likely to sprout. Remote access to diagnostics and telemedicine are also areas of predicted growth which will certainly attract VC firms and their institutional investors to the deal-making table.

Increased capability and penetration of digital payments has also led to demand spikes in online commerce and food delivery in recent years and near-exponential growth over the months of April and May as dine-in restaurants remained closed. Consumers have now become accustomed to home deliveries and are likely to continue to subscribe to this convenience even as the world emerges from Covid-19.

Education, in the form of online and distance learning is another sector fast gaining traction under these irregular circumstances with many schools and academic institutions poised to shift entirely to remote learning. The need for the school system to be fully digitised in the event of any future lockdown requirement should mean that online learning platforms are able to attract significant investment over the next few years. In the workplace, technology is helping organisations to maintain business continuity as their employees are likely to remain working from home for the foreseeable future. Additionally, video conferencing tools and software will reduce the need for business travel or even large office spaces.

Of course, there are many industries which will not be able to make the transition to remote working as easily, namely hospitality, construction, healthcare, manufacturing and travel. Organisations in these sectors will probably be forced to resort to furloughs and layoffs and, in the long-term, many roles will be made redundant through technological advances and the adoption of robots.

Although the opportunities that currently present themselves would seem to suggest that tech-oriented VC firms should have no trouble raising SWF capital for investment, it is worth mentioning that this would not necessarily be consistent with recent trends. Sovereign wealth fund investment in venture capital deals were at their lowest levels in six years in 2019, according to research from ICEX and the Spanish-based IE Centre for the Governance of Change. This is attributed, in part, to the underwhelming performance of Uber’s IPO and the shelving of WeWork’s. Incidentally, both companies had considerable backing from two prominent SWFs in the GCC.

Given this anti-climax, and also taking into account the existing inability for potential investors to fly for meetings as well as a need to re-evaluate deals under new market conditions and one could be forgiven for thinking that SWF appetite for VC investments was on the wane. However, according to the IE Centre for the Governance of Change research, and as we have described above, interest in biotechnology (which accounted for over 15% of SWF-backed ventured rounds over the past few years) is very much on the rise. Additionally, history tells us that VC funds raised at the very bottom of a downturn tend to perform the best over time. This makes the current economic environment prime for SWFs to leverage their VC partner firm relationships with regional start-ups in the search for the next unicorn.

Written by Daniel Pacic, Executive Director, Abu Dhabi for the Sovereign Wealth Quarterly