The article first appeared on OMFIF on  December 10th 2024.

Winston Ma is Adjunct Professor at the NYU School of Law and former Managing Director and Head of the North America office at China Investment Corporation.

Public funds are reshaping investment in the digital economy

The world is entering the age of artificial intelligence. Sovereign funds are increasingly investing in the technology industry and digital economy sectors, on par with private equity and venture capital funds. They are active globally, due to both overseas investments (global portfolio) and overseas presence (global offices). As a result, many sovereign investment funds are transforming themselves to better invest in the new digital economy.

They are the ‘unicorn-makers’ behind the scenes. They have shaken off their traditional, passive investor roles and stepped into the vanguard of the digital transformation. Their ample resources, preference for lower profile, long time horizons and adherence to sustainability make them the perfect shareholders and strategic partners for tech startup founders.

They have helped create and sustain an environment that has fostered the rise of Uber, Alibaba, Spotify and other transformative players during the mobile internet boom in the last decade. Now in the AI era, they are more active than ever. Just weeks ago, MGX, the newly established tech investing company affiliated with the United Arab Emirates’ Mubadala, joined OpenAI’s mega funding round of $6.6bn as a major investor. Not to be outdone, in November Saudi Arabia was reported to be planning a $100bn AI initiative to rival UAE’s tech hub, in a setup similar to its existing trillion-dollar sovereign fund PIF.

Digital infrastructure

In addition to direct tech startup investing, sovereign investors are the long-term capital providers for the digital economy infrastructure, funding innovations such as 5G towers, fibre networks and undersea cables. Digital infrastructure has become a frontier asset class as a proxy for investing in technology, and digital infrastructure investments also provide an avenue to foster development goals in countries themselves, for which the Indonesia Investment Authority and Malaysia’s Khazanah Nasional Berhad are perfect examples.

Now, the AI boom is leading to tremendous demand for digital infrastructure like data centres, which have emerged as the top real asset segment for sovereign funds. In fact, the long-term capital of sovereign funds has served as the most important cornerstone investments in the latest major projects globally.

MGX teamed up with BlackRock, Global Infrastructure Partners and Microsoft to launch a $100bn AI partnership to invest in data centres and power infrastructure. Singapore-based GIC Real Estate and the Canada Pension Plan Investment Board have signed a joint venture agreement with Equinix, with the intention to raise over $15bn for data centre development in the US. And AustralianSuper invested $1.5bn in data centre developer DataBank to fund three new data centres in the US.

Turning to sustainability

These super-asset owners are not only the movers and shakers of the deal markets, they are also the ‘sustainability guardians’. Norwegian fund NBIM, whose $1tn portfolio holds, on average, 1.5% of every listed company on earth, has actively voted in the tech sector in recent years, including voting ‘no’ multiple times at Google, Amazon and Meta. Such actions reveal a major shift: environmental, social and governance-conscious sovereign funds are starting to campaign for a sustainable cyberspace, using tactics developed from green investments in sectors relating to fossil fuels and climate change.

This comes at a time when data is viewed by many as the ‘new oil’ of the ‘new economy’. For existing portfolio companies, sovereign investors take on more active governance roles to mitigate and even pre-empt the negative externalities of advanced technology on society. For new investments, sovereign funds’ sustainability policies have led to greater scrutiny of the tech companies and impact of their innovation, especially their dealings with data privacy, information security and their role in enabling government and corporate  surveillance.

In short, sovereign funds are the new, powerful venture capitalists that will reshape the digital economy.