I was recently in a San Jose coffee shop with a friend who runs a sovereign development fund. We were chit-chatting about a variety of things and, as I often do, I asked him what he’s most excited about in terms of investment opportunities. What followed was quite interesting. Here’s a re-hash of the conversation:
Friend: “What I’m most excited about these days? I guess I’d say it’s investing in time machines. That’s why I’m back here in Silicon Valley; there are some fantastic time machines here.”
Me: “Say what? I think you’ve been spending a bit too much time in Washington and Colorado. Time machines?”
Friend: “Not actual time machines [eye roll] ... We’re investing in companies in Silicon Valley that we can bring back to [country name] and market. Because Silicon Valley is ten years ahead of us in certain domains, we are looking to bring these technologies ‘back from the future.’ It’s a great way to think about investing in the Valley; with these portfolio companies/corporate partners we are always looking to take advantage of the temporal disconnect between this place and our home market. The objective is to drive high returns and facilitate sustainable development through the dissemination of new technologies. It’s been working quite well...”
Cool, right? This type of cross-border arbitrage is not a strategy that’s completely foreign to me; there are lots of PE shops and VC firms popping up these days that purport to offer unique access to Asia for example. But I do have to say that I’m a fan of this ‘time machine.’ By bringing cutting edge technologies ‘back from the future,’ SDFs can drive solid investment returns while helping developing economies leapfrog developed economies in certain stages of development.
Is it a coincidence that Malaysia’s SDF, which returned 19% in 2013 and has a decennial IRR of 12.5%, has just set up a new office in Silicon Valley? I think not.
I’ve talked a lot about how SDFs can (under certain circumstances) generate high returns, facilitate development and thus be useful co-investment partners for other long-term investors looking to access a certain country or region. (For those that aren’t up to speed on SDFs, read here, here, here, and here.) In general, SDFs can be ideal co-investment partners for foreign, long-term investors to help guide them into locally grown investment opportunities to spur job creation and development.
I’m increasingly of the mind, however, that SDFs can also play a very valuable role for companies looking to internationalize. Indeed, this time machine strategy is one where an SDF can be a partner of choice not just with foreign investors but also with successful foreign companies to help guide them into the local market.
As such, this presents a nice opportunity for the investors but it also offers a fantastic opportunity for companies looking to move overseas (especially if the SDF represents an attractive market for the company). By partnering with an SDF, the company can quickly internationalize and gain access to markets with little competition and lots of customers.
As I’ve said before, the most successful SDFs seem to be those that see their role as launching new industries and then participating alongside the companies in those industries. These successful SDFs tap into the power of ‘catalytic capital’ by being first investors into a new industry or geography. In the case of the time machine, it’s a similar function but, in this case, they are serving as the bridge to bring new technologies into their economy.
In sum, I think there’s a real opportunity to for SDFs from ‘the past’ to set up in centers of innovation in ‘the future’...
