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Thu 21 Sep 2017 09:26 AM

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Inside the world of Intelligent investing

GCC funds, particularly from Saudi Arabia and Abu Dhabi, are making an increasing number of international technology investments, as they diversify and, at the same time, strive to build knowledge economies

Inside the world of Intelligent investing

It is, quite simply, the world’s largest private equity fund. With $93bn at its disposal and a further $7bn set to be raised, the Vision Fund, run by Japan’s SoftBank, is shopping for technology investments.

The fund’s largest single backer is Saudi Arabia’s Public Investment Fund, which has put in $45bn, while Abu Dhabi’s Mubadala Investment Company is third on the list with a $15bn contribution. Areas such as biotechnology, telecommunications, robotics and artificial intelligence are likely to be high on the fund’s list of priorities.

While SoftBank has said at least $50bn would be invested in start-ups in the US, Europe’s technology sector is likely to also be a target.

It is part of what some observers have seen as a growing interest in European technology companies from Middle Eastern investors, particularly those from the GCC, who have until now attracted more attention for their big ticket real-estate investments.

Rob Kniaz, an American who co-founded the London-based early-stage investment company Hoxton Ventures, says investors from across the Middle Eastern are taking part in funds or direct investments.

“I think it’s a natural progression for most investors… They tend to start in real estate because it’s quite universal [then] over time they tend to augment with tech or add it to their portfolio,” he says.

The European tech sector is less awash with investors than its equivalent in the US (where Saudi Arabia famously invested $3.5bn in Uber last year, and the Abu Dhabi Investment Council bought a stake in WhatsApp three years before), potentially meaning it offers better opportunities.

“They can cherry pick and find well-placed deals that can give them the growth they’re after,” he says.

Mubadala Investment Company invested $15bn in SoftBank’s Vision Fund.

Indeed Silicon Valley is not just expensive but is also “a bit of a cottage industry”, according to Kathryn Saklatvala, co-author of a 2016 report Pursuing Innovation: Sovereign Wealth Funds and Technology Investment.

“It’s quite dependent on building relationships and who you know, and new entrants into the space can struggle to gain the access they want to at attractive fees,” she says.

“In the main, it’s seen as an area that’s hard to gain the right price, given how expensive things are now, and how in demand venture capital funds on the West Coast are. The UK and Europe [are] seen as slightly more open.”

Dubai-based Naseba, which organises introductions between business people, noted in a 2016 briefing paper that the GCC’s own tech sector is at an early stage of development and so offers limited investment opportunities, causing investors to look outward for opportunities.

“Although many investors are choosing to hunt for tech opportunities in the US, several European markets are attracting Middle Eastern capital as well. This is particularly true for rising start-up and tech hubs, like Berlin,” the company said, and added that e-commerce, mobile applications and financial technology were popular.

Among the deals so far has been Abu Dhabi Investment Council’s participation in music streaming service Spotify’s seventh funding round, in 2015, which raised $400m. The following year the Oman Investment Fund (OIF) contributed to a $293bn funding round of Oxford Sciences Innovation, which supports start-ups created from breakthroughs spun out of Oxford University.

Also in 2016, the OIF took part in the $95m funding round of Cambridge Innovation Capital, a parallel venture based in the UK’s other top university city, and launched the $200m Oman Technology Fund.

Until now, Chinese investments in Europe’s tech sector have been larger than those made by Middle Eastern interests and have attracted more column inches in the media. These Chinese investments — more than $11bn last year alone — have raised concerns over a “laissez-faire” approach to foreign takeovers, especially in Germany, given that Chinese investors are looking to gain access to technology. There are fewer such concerns when it comes to Middle Eastern investors.

“There isn’t the worry about technology transfer that there is with the Chinese,” says London School of Economics academic Professor Mark Thatcher, who was commissioned by The Kuwait Programme on Development, Governance and Globalisation in the Gulf States to author a 2013 report titled, National Policies Towards Sovereign Wealth Funds in Europe: A Comparison of France, Germany and Italy.

There are multiple reasons why, as Mike Reid, managing partner of London-based Frog Capital, puts it: “Tech has gone from a niche sector to an increasingly interesting theme”.

He cites the technology itself: the next phase of the internet, the smartphone and the creative wireless communication.

“These three things are disrupting and innovating markets from automotive… to media,” he says.

“[Another factor] is that many quoted stock markets and bond markets, they’re at all-time highs and therefore people are looking to diversify and thinking you can make longer-term attractive returns.”

And it is not just sovereign wealth funds that are taking a more active interest in the European tech sector. Reid has seen enthusiasm too from Middle Eastern family offices, part of a trend for family offices to get “closer to the entrepreneurial and growth investing ecosystem”.

So we can expect more deals in future, both from high-profile sovereign wealth funds and under-the-radar family offices.