It is a sign of the times that I spent some time thinking about whether the title of my post would offend some people, as sexist or worse. I briefly considering expanding the title to "Sugar Daddies and Molasses Mommies", but that just sounds awkward, or even replacing the words with something gender neutral, like "Glucose Guardians", but very quickly passed on the idea, deciding to stay with my initial title. After all, I am too old to care about what other people think, and the type of person who would be offended by the title, is probably not someone that I want reading this post in the first place. The message that I was trying to convey, and “sugar daddy” does it better than the alternatives, is that being dependent on an entity to meet your financial needs will impede your capacity to be self sufficient and will undercut accountability. That was the thought that came to mind, as I was writing about the US government's plans to break up big tech, and chronicling how much the big tech companies have struggled, trying to enter new businesses, notwithstanding the capital and brainpower that they have at their disposal. In keeping with my inability to stay focused, that then led me to also think about sovereign wealth funds, an increasingly powerful presence in both private and public equity markets, and then about green energy, a favored destination for impact investors over the last two decades. What do corporate venture capital (CVC), sovereign wealth funds (SWF) and green investing share in common? They all have had almost unimpeded access to capital, from parent companies (with CVC), the government (with SWF) and impact investors (for green investing), and seem to, at least collectively, punch well below their weight, given their size.
Corporate Venture Capital
Corporate venture capital (CVC) refers to capital invested by established firms, into young companies and start-ups, sometimes in the same business and sometimes in others. The motivations for the practice vary, and the payoff from CVC is debatable, but it is undeniable that CVC is growing as a segment of venture capital, and that it is not only affecting the pricing of the young companies that are targeted, but also altering the economics of venture capital, in the aggregate.
Motives
To understand why companies turn to investing like venture capitalists, I will bring in my life cycle perspective, with cash available, investment choices and growth potential at each phase:
For most young companies, where the free cash flows from existing businesses are negative, because of shaky profitability and large reinvestment needs, investments are likely to be focused on existing businesses, and venture capital will not be on the menu. As companies mature, with business models delivering profits and reinvestment needs declining, it is not surprising the companies look outward, with acquisitions often entering the equation. For those companies that are able to scale up, with growth, and especially so in businesses where there is uncertainty about how the future will unfold (in terms of markets and technologies), venture capital can become a more attractive alternative to both internal investments or acquisitions, because it allows these companies to spread their bets across multiple plays, hoping to hit it big with a few of them. Seen with this perspective, corporate venture capital investments can be framed in one of two ways:
- Replacement for internal R&D: For some companies, corporate venture capital investments displace internal R&D, designed to generate future products and develop new technologies. This is, again, more likely to happen as companies age, and their internal R&D loses its punch. Arguably, this is the prime rationale for the growing venture capital arms at pharmaceutical companies, with almost $30 billion invested in biopharma ventures just in 2022.
- As real options: In businesses where there is substantial uncertainty about how product technologies and markets will evolve over time, companies may decide that investing in young businesses with divergent and sometimes competing technologies will yield a higher likelihood of success than investing in just one, either through internal investments or through an acquisition. In effect, this company is creating a portfolio of options in its CVC holdings, and hoping that big payoffs on the options that pay off will cover the costs of the many options that will expire worthless.
There are two other reasons why companies may play the venture capital role, and they lead to very different choices in that role:
- Side benefits to core business(es): A company may make venture capital investments in businesses with the intent of using those businesses to augment core business growth and profitability. Thus, while these investments may not generate payoffs to the company as stand-alone investments, they may still create value, if the side benefits are significant.
- Stand-alone VC business: In some companies, especially those with slowing core businesses, the corporate venture capital arm can be designed to be a separate business, structured and treated like a stand alone VC business. In this structure, the corporate venture capitalist behaves like regular venture capitalist, with returns measured on finding the right start-ups to invest int and then exiting from their investments, by selling to other venture capitalists, selling the company to an acquirer or taking it public.
In summary, corporate venture capital is likely to not only be more diverse, across CVC arms, but even within the same CVC arm, investments can be made with different motives.
While corporate venture capital may be viewed as a departure from much of the rest of the investments that a company makes, they are seldom structured as independent entities. Put simply, there are relatively few firms, where there is corporate venture capital arm or division, that is in charge of, and accountable for, CVC investments. A survey of companies with corporate venture capital arms in 2021, for instance, found that less than ten percent are set up as standalone legal entities that resemble institutional venture capital. Many CVC investments are "off the balance sheet", reducing both independence and accountability, but with widely varying capital commitments from the parent company:
- In some companies, a multi-year capital commitment is made to the CVC, allowing it more freedom to make commitments of its own.
- In other companies, the commitments are made on annual basis, reducing the autonomy of the CVC in its own investment decisions
- Finally, there are companies where the capital available to the CVC is residual, reflecting the cash flows to the parent, where individual CVC investments may need corporate approval, reducing independence even further.
In sum, no matter how they are structured, CVCs remain tethered to their parent companies, dependent on them for funding, and affecting what they invest in, and how much.
Magnitude
Corporate venture capital has existed, in one form or the other, for decades, but it has grown to become a larger part of overall venture capital investment, as can be seen in the graph below, where I look at CVC in aggregate dollar value, and as a percent of overall venture capital investment:
CVC has grown from less than 25% of overall venture capital investing in 2005 to close to half of all VC investment in 2023. While CVC accounts for a smaller percentage of deals made, it makes up for that by investing in much bigger deals:
Corporate venture capital tends to invest in much bigger companies than the conventional venture capital with an average post-deal value of $500 million in 2023, compared to $210 million for conventional VC.
To get a measure of how a CVC arm evolves, I took a look at Google Ventures, Alphabet's CVC arm, and one of the largest and most active corporate venture arms in the world. Founded in 2009, and with Alphabet as its only funder, Google Ventures had over $10 billion in invested, in 2024, in more than 400 technology startups, spread across multiple businesses including healthcare, the life sciences and even financial services. Google Ventures has prided itself on using data-driven algorithms to determine what start-ups to invest in, and when to halt a deal, and being manned by engineers, rather than financiers, though it scaled back the practice in 2022. Over its lifetime, Google Ventures has picked some big winners, including iUber, Airbnb and Slack, all of which are now public companies with substantial market capitalization. Not all corporate venture capital forays have happy endings, though, as was the case with SAP, which shut down its corporate venture arm in 2024, seven years after starting it, because of deal setbacks.
Performance
Going back to the motives for corporations enter the venture capital game, you can broadly categorize CVCs into two groups, broadly based upon the benefits they expected from their investments:
- Financial: In this category are investments made into venture capital, where the returns come directly from the investment, in the form of cash flows or at the time of exit (in a sale or public offering).
- Strategic: In this category are venture investments, where the benefits are still financial, but accrue to the parent company in the form of more efficient R&D or as options that pay off, and often more in the long term.
A survey of 257 CVC funds in 2024 yielded the following breakdown of where the payoffs are expected:
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| SVB CVC Survey in 2024 |
Note that only 15% of the surveyed funds are purely financial, with the rest broken up into those that claim either a primarily strategic motive or a hybrid (mix of financial and strategic).
It is the mixed objectives of CVC that make it difficult to assess how well it has performed on its investments. Thus, while corporate venture capital collectively generate lower returns for their capital providers than tradition venture capitalist, in their defense, they provide benefits that go beyond the VC returns (in cash flows and exit), to the parent company's bottom line (as higher revenues, lower costs and more efficient innovation). The SVB survey of corporate venture capital provides an interesting picture, contrasting how companies backed by CVC differ from traditional VC-backed companies in terms of exit:
Note that fewer CVC-backed companies go out of business, than do VC-based companies, with half the failure rate and more companies advancing to the next round. While this is good news for the funded companies, indicating that CVC funding is more durable and long standing, than traditional VC, it does point to a weakness in the CVC model. VC success comes from finding the right targets, and entering and exiting at the right prices, but it also comes from being ruthless in terms of cutting off companies that do not measure up. To the extent that the data in this table can be generalized to all CVC ventures, that lack of ruthlessness may eat into returns, since weak companies will continue to get funding for longer than they should.
There is one final test, albeit a flawed one, to examine whether corporate venture capital adds value to the parent company, at least in the aggregate, by looking at stock price and operating performance of companies with CVC programs. In a 2010 study of 61 firms with CVC arms, the researchers concluded that shareholders of the CVC parent companies react negatively to investments made by the CVC, and also that the reaction was less negative with CVCs that were structured as standalone units. That result clearly is not conclusive proof that CVC is value-destructive, since the optionality or side benefits from CVC are both uncertain and may take a long time to manifest.
Sovereign Funds
In 1953, Kuwait, seeking to create an investment vehicle for the oil riches that were just starting to emerge, created the very first sovereign wealth fund, i.e., a fund that is funded by the government presumably to protect and advance the interests of its citizens. Since then sovereign wealth funds have multiplied, with a significant percentage still in commodity-rich companies and funded with commodity wealth, but their reach has widened. In the United States, for instance, where the Alaska fund, a funded by the state of Alaska, from oil production, has been the only sovereign fund of any magnitude, both sides of the political divide have started discussing the need for a sovereign fund for the country.
Motives
Looking across the sovereign fund universe, it is clear that a significant majority of these funds originate in commodity-rich (mostly oil) countries, and that their funding comes from exploiting their oil reserves. Since oil is a finite resource, and reserves will be emptied out over time, it does make sense for countries with commodity riches to set aside some of these richest, in the good years, and to invest those funds for the long term benefit of their citizens. Thus, the first mission that sovereign fund managers have is a conventional one, shared by all active fund managers, which is to deliver returns on their investments that augment and grow the fund. It is this context that they allocate their funding over multiple asset classes, and within each asset class, pick and choose what to invest in. It is true that there are some differences, even on this money management dimension:
- Sovereign wealth fund managers control a wider array of the portfolio management process than most traditional fund managers. Thus, they often make both the asset allocation decision, as well as the security (equity, bond, real estate project) selection decision, whereas traditional fund managers often have compartmentalized roles, specializing in a specific asset class.
- Sovereign fund managers also operate under a different set of constraints, with some built into their mission statements, that determine what they can invest in, and how much. Thus, a sovereign fund can be required to invest in some businesses and geographies, and barred from investing in others, whereas conventional fund managers often do not face the same constraints.
Sovereign wealth funds face a unique challenge, which is that they have a second mission, which can sometimes be elevated about the fund management mission, which is to serve the national interest, as can be seen in the following examples:
- Economy building: The Public Investment Fund (PIF), Saudi Arabia's sovereign fund, has been given the mission of delivering on Vision 2030, the Kingdom's ambition plan to wean the Saudi economy away from its dependence on oil. As a consequence, the fund invests a significant proportion of its money in Saudi-based businesses in aviation, defense, entertainment, tourism and sports.
- Green energy: Given the global angst about climate change, it should come as no surprise that many sovereign funds are required to invest a portion of their portfolios in green energy and renewables, even if those investments do not carry their economic weight. Norges, the largest sovereign wealth fund in the wold, has a renewable energy component of the fund designed to invest in wind and solar infrastructure.
- Sector strengthening: In some cases, sovereign wealth funds are given the mission of building or strengthening a domestic sector. The China Investment Corporation lists "maximizing return with acceptable risk tolerance" as a core objective, but also lists that its mission includes recapitalizing "domestic financial institutions as a shareholder abiding by relevant laws in order to maintain and increase the value of state-owned financial assets".
Magnitude
The sovereign fund universe has increased dramatically in the twenty first century. In the graph below, I look at the number of sovereign wealth funds in existence, by year, and the aggregated value of these funds:
The number of sovereign wealth funds approached one hundred, at the end of 2023, and they collectively controlled more than $12 trillion in funding at the time. Asia has the largest number of sovereign wealth funds, but the funds from the Gulf/Middle East are among the largest, in terms of funding at their disposal. In fact, you can see their dominance by looking at the list of largest sovereign wealth funds at the start of 2024:
In 2024, the largest sovereign wealth fund is the Norges, the Norwegian sovereign wealth fund, which was funded with oil wealth from the North Sea oil reserves decades ago. The Asian entrants on this table include three funds that are from China (including the Hong Kong fund) and two longer standing players from Singapore (GIC and Temasek). While the United States does not have a sovereign fund, the state of Alaska has one, funded again by the state’s oil wealth, with benefits accruing to its state residents; the Alaska Permanent Fund, as it is called, paid a dividend of $1,312 to every Alaska resident (with a residency of at least a year) in 2023, and is expected to pay more than $1,700 a resident in 2024.
These funds have wide latitude on investing, and they invest across asset classes - equities, fixed income and alternatives (which include private equity, real estate, infrastructure, hedge funds and commodities) :
Their investments are in both public and private businesses, as sovereign wealth funds increasingly look for returns in younger companies and businesses that would be targeted by venture capitalists.
In terms of structure, there is an extraordinary amount of diversity in how these funds are structured, and who controls the levers and evaluates performance. At one extreme are the Norges and the Singapore-based funds, where transparency is par for the course, and the fund managers enjoy a high degree of independence from governments. At the other extreme, the line between sovereign wealth fund and the government is blurred, opacity (about what the fund is investing in, and how well or badly these investments are doing) is the name of the game and there is little or no accountability. Not surprisingly, the latter group is more vulnerable to political pressure and corruption, with some SWFs becoming slush funds and patronage machines for the politicians that they answer to.
Performance
The research on active investing suggests that active investing collectively has trouble matching the passive investing returns (from owning index funds), especially after the costs of active investing have been brought into the equation. But how does sovereign wealth fund investing do, relative to passive and other active investing? The answer, at least in the aggregate, is not so well, with equity in the companies targeted by SWFs underperforming the market significantly, with the caveat that performance is much better at transparent SWFs than at opaque ones. Looking at the impact on corporate performance, the results are mixed, with increases in profitability, when the SWF's holdings are less than 2% of outstanding shares, but decreases in profitability and worsening operating performance for larger holdings. In short, if the core mission for sovereign wealth funds is preserving and growing a nation's wealth for its citizens, many of them are falling short, and if it is activism at the investing companies, it is not working.
That said, there are outliers, and looking at them may provide us some insight into why sovereign wealth funds under or out perform. While many sovereign funds are opaque on performance evaluation, offering little in public on historical performance relative to benchmarks, Norges provides exhaustive documentation of how their active investing has measured up to passive alternatives. Since the fund is invested in different asset classes, let us focus on just the equity investments made by the fund and the comparison that they provide with a benchmark (admittedly of their creation):
As you can see, the fund has outperformed the benchmark, albeit by a very small amount, but given the troubles of active investing, the fact that the alphas are positive is a substantial win. At the other extreme, consider the story of 1MDB, the Malaysian sovereign wealth fund, set up in 2009 with money from an oil joint venture (with PetroSaudi), with the intent of encouraging investment in Malaysia. In the years that followed, hundreds of millions of dollars from the fund was used to fund Hollywood movies and bankroll the lavish lifestyles of connected financiers and politicians, before leading to the jailing of Najib Rezak, Malaysia's prime minister, and a $3.9 billion charge against Goldman Sachs, for the bank's role in the scandal.
Green Investing
It is undeniable that climate change has moved up the list of global concerns, and if like me, you followed COP28, the climate change conference, this year, or even read news stories about the weather in your part of the world, the need to reduce our carbon footprint does seem urgent, and there are laws, rules and resources that are being directed towards that end. In fact, if investing were measured on the virtue scale, there is perhaps no more virtuous version than green energy investing, and hundreds of billions have been directed towards it.
Motives
Of the three groups that we look at in this post, green investing's motives should be the simplest to disentangle. It is to push the world away from fossil fuels to alternative energies, but that is where the consensus ends. For some players in this space, reducing the carbon footprint and fighting climate change is the core mission, with returns being a constraint rather than an objective. Thus, for foundations and perhaps even some endowment funds, investing green with as little loss in returns as possible becomes the mission statement. Unfortunately, the bulk of green investors want to have their cake and eat it too. Among impact investors, a prime source of funding for green investors, a significant majority of impact investors (close to 64%) want to have their cake (at or above-market returns, given risk) and eat it too (by making an impact).
With equity investors in the green space, this hoped for payoff takes the form of positive alphas, while directing their money to solar, hydro and wind energy investments, and with green loans and green bonds, the higher returns come from being able to earn higher interest on their lending, given default risk.
Magnitude of Investment
While the speakers at COP28 have lots of legitimate grievances against governments and markets, including the subsidies that fossil fuel companies have received over their lifetime and the laws that enable fossil fuel energy consumption, one grievance that they cannot have is that not enough money has been spent on developing alternative energy, i.e., energy from everything but fossil fuels. Consider the following graph, that reports investments made in billions of US dollars in fossil fuel and alternative energy sources each year.
Barring 2015, not only has far more been invested in alternative energy than in fossil fuels, but the difference is widening. In the aggregate, close to $15 trillion has been invested in alternative energy, and other than a very small slice that has gone into nuclear and low-emissions fuels, the rest has gone into green (solar, wind and hydro) energy.
The money invested in green energy has come from multiple sources. A small part has come from governments, either directly or through sovereign wealth funds. A significant portion has come from impact investors, a catch-all for investments made by foundations, investment funds, family offices, pension funds and corporate investors in the space, with investments of about $2.5 trillion in 2021, and expected to grow to more than $5 trillion by 2026. Note also that investing in green energy takes both the equity and bond routes, and the green bond market has allowed companies to tap into "lower cost" financing, to facilitate their growth in the alternative energy space. In 2023 alone, $575 billion of
green bonds were issued, bringing the size of the green bond market to almost $4 trillion, in the aggregate.
Performance - Financial and Carbon Footprint
For defenders of green investing, it is good news that that so much money has been directed towards green investing, but that is unfortunately where the good news seems to stop. For the most part, the payoff from green investing has been surprisingly small, on both the financial and the social dimensions, especially given how much money has gone into it.
Let's start with the financial payoff from all of the trillions of dollars that have gone towards making the world greener:
- Business building: When trillions of dollars are invested in a space, you would expect, at some point in time, that this will lead to companies emerging from the space with business models that can deliver sustained profitability and command large market capitalization. In the green investing space, that has not happened (yet). For instance, the 273 publicly traded companies in the alternative energy space (including almost every aspect of that space), in October 2024, had a collective market capitalization of $506 billion, and they reported aggregated revenues of $117 billion in the most recent twelve months. In contrast, just one fossil fuel company, Exxon Mobil alone had a market capitalization of $532 billion, and revenues of $479 billion. Green investing defenders will argue that it will take time for these companies to mature and deliver profitability, but the clock is ticking and the trend lines do not look promising.
- Investor returns: On the other side of the equation, what type of returns are investors in green energy getting from their investments? The answer will depend on whether you are looking venture capital investors in green energy or public market investors, and also on the time period that you examine. While returns for both groups were robust during portions of the last decade, when investor demand for green investing was high, they have come back to earth, and especially so in the last few years. Here again, your response may be two-fold. The first is that you need patience, for these green energy investments to pay off and deliver profits and returns. The second is that green investing is not about delivering excess returns, but about saving humanity from global warming. I have absolutely no problems with the latter rationale, as long as green funds (both equity and bond) make it clear that they expect to under perform markets, when they seek out capital.
In fact, if your response to the financial impact of green investing being unimpressive is that these investment are saving us from global warming, the numbers are not supportive of the virtue thesis. In the graph below, I look at energy consumption, based on source:
It is stunning how small an effect the trillions invested in the space have had on where we get our energy, with fossil fuels accounting for about 81.5% of total energy consumption in 2024, about 5% lower than it was twenty years ago . In fact, much of the gains from solar, hydro and wind energy have been offset by a loss in energy product from nuclear energy, the one alternative energy source where almost no money was invested over the period. It is true that there are parts of the world (Latin America and Europe, for instance) where green energy has made significant inroads, but if global warming is an existential crisis, that is small consolation. For those who argue that shifting to green energy takes time, I have two questions. The first is, unless I misheard what climate change advocates are telling me, time is not an ally and we don't have a luxury of moving slowly. The second relates to economics: if it has cost us five trillion dollars (or more) to reduce our dependence on fossil fuels by 5%, will we go bankrupt trying to reduce it by another 35%?
There are some who will argue that the money spent on green investing has given rise to innovation and new technologies, but I wonder whether that innovation and those technologies are the ones that we would have invested and developed, without a firehose of capital raining down on green enterprises. There is research starting to percolate through the system that we could have made a much bigger impact on greenhouse emissions by spending our R&D on brown innovations, i.e., innovations that make fossil fuels cleaner-burning and less damaging, than on green innovations, i.e., innovations that explicitly focus on just green energy. More importantly, and as noted earlier, it can be argued that the impact investing definition of alternative energy excluded the one source of energy that has had a track record of making a significant impact on energy consumption, i.e., nuclear energy, and spending a fraction of what was spent on nature's energy sources (solar, wind and hydro) on developing safer ways of delivering nuclear power would have moved the fossil fuel dependence needle by far more.
In short, green investing, in the aggregate, has failed in terms of delivering financially (both in terms of business building and delivering returns for investors) and socially (in terms of reducing dependence on fossil fuels).. It is the point that I made in my post on impact investing, where I argued that the prime beneficiaries of the movement have been the consultants, green fund managers, advisors and academics who live in its backwaters.
The Sugar Daddy Syndrome
Clearly, corporate venture capital, sovereign wealth funds and green investing have very different roots and motives, and have evolved differently, but they do share a common feature. Given how much has been invested in each, they have under delivered, at least collectively, and the vaunted side benefits have been slow to manifest, again with exceptions. I am perhaps overreaching, but here are the reasons as I see them:
- Assured funding: Each of the three groupings has assured funding, though the degree of assurance and magnitude can vary across individual players. With corporate venture capital, it is the parent company, with sovereign wealth fund, it is the government, and with green investing, it has been impact investors, at least for the last two decades. That assured funding may give them an advantage over their counterparts - VC for CVC, traditional funds for sovereign funds and conventional energy companies for green energy investments- but it does come with a downside. Looking at start-ups and very young companies that manage to make the transition to businesses, one factor that plays a role in focusing attention on building business models is desperation, i.e., the fear that if you do not, you will go out of business. That desperation is lacking in all three groupings highlighted in this post, in many cases. Start-ups and young businesses founded by corporate venture capital may not feel the urgency to create and build business models, if they perceive the capital window at the parent company will stay open. In active money management, a big investing mistake can lead to client flight, but for a sovereign fund, that mistake may quickly be covered by government largesse. Finally, with green investing, one reason that there are so many bad companies and investment funds continue to survive is that they use their virtue at least on the climate change front to attract more capital.
- Mixed Mission: I noted that for each of the three groups, there is a mixed mission, where, in addition to, and sometimes, instead of, their core missions (start-up to success for CVC, investing alpha for SWF and producing non-fossil-fuel energy at a reasonable price for green investing), they are given other missions. Running any entity, when you have more than one core objective, is always tricky, and it becomes doubly so, when you have two or more objectives, pulling in different directions.
- Stakeholder distractions: Every entity has multiple stakeholders, and navigating the conflicting interests to deliver success is difficult to do. With the three groupings highlighted in this section, there is at a stakeholder that is the equivalent of a 600-pound gorilla, and what it wants can often overwhelm every other interest. With CVC, that gorilla is the parent company, and the CVC's performance can reflect decisions made at the parent company level that are too big of a handicap to overcome. With sovereign funds, it is the government, and the people who have oversight of the funds, and to the extent that they call the shots, sometimes with other national interests (protect bad banks from failing by investing in them), sometimes with political end games (hire more workers or not fire workers, just ahead of elections) and sometimes for personal reasons (corruption), the SWF can be left with the residue. With green investing, it may be impact investor skews and biases, and governments, that provide the tax benefits and subsidies, pushing companies into technologies and investments that they would not have otherwise.
- Non-accountability: As you can see, in our discussion of performance for CVCs, sovereign funds and green investing, under performance can always be excused or explained away by either pointing to other mission objectives or arguing that in the long term, success will show up. Thus, a CVC that underperforms a VC will argue that while its corporate ventures did not meet the mark, the side benefits that accrued to the parent company make up for the underperformance. With sovereign funds, it is convenient to point to the other roles - nation building, sector fixing or social safety net - that they play that may excuse the negative alpha. With green investing, the cloak of planet defender comes in handy, whenever the absence of results (either in financial or social terms) is brought up.
That said, though, there are outliers in each group that seem to thread the needle of competing missions and interests and deliver successful outcomes. Using some of those successes as guide, I would argue that there are four features that these winners share in common.
- Independence: With CVCs, we reported that very few are set up as stand alone entities, with control, over funding and investing choices. If you are investing significant amounts of money through a corporate venture capital, it may make sense to not only separate the CVC from the rest of the business, but also to let the individuals that you pick to run the CVC make decisions that are not second guessed. In the context of SWF, one reason that Norges has been able to deliver above-benchmark returns is because its executive board is insulated from government interference.
- Transparency: In a related point, many CVCs and SWFs are opaque about their working and holdings, with no good business reasons for secrecy. That makes it easier for them to not only hide inefficiencies but almost impossible to assess performance. That opacity is particularly present with the side-missions that these entities are called on to perform - the actions that protect national interests or strengthen financial institutions, for instance, are open for interpretation. At the best performers, though, transparency is more the norm than the exception, and that transparency extends to almost every aspect of how they operate.
- Separation of motives: I think it was Marc Andreessen who described a house boat, as neither a very good house nor a very good boat. When entities are asked to deliver different missions, intermingling them in decision making will create bad choices. If the Saudi government does want PIF to deliver both solid risk-adjusted returns on its investments and diversify the Saudi economy, it will be better served to separate PIF into two entities - a fund management entity that invests in the best investments it can find and nation-building arm, whose job it is to make the investments or provide the subsidies that work in delivering that mission. Again, at the best performers, there is more of an an attempt to separate core missions from side missions, with clear guardrails on the latter.
- Accountability: As things stand, it is difficult to hold the entities that make up each of these groups accountable, and the mixed mission is the primary culprit. By separating the missions, accountability becomes easier, since the core mission part of the company can be assessed using the performance metrics of that core mission, and the side mission on how much the money spent advances movement to the social or side goal. That accountability should be followed up with actions, i.e., a greater willingness to shut down corporate venture capital arms that do not deliver and to convert under-performing sovereign wealth funds from active to passive.
I went into this post with a hypothesis that corporate venture capital, sovereign wealth funds and green funds/companies underperform their conventional peers - venture capital for CVC, mutual and pension funds for sovereign wealth funds and energy funds/companies for green investors, and that it is assured funding that creates that effect. Having looked at the data, I have rethought my hypothesis, or at least refined it.
- It is true that, in the aggregate, that the underperformance hypothesis finds backing, with the median player in the CVC, SWF and green investing but there is wide divergence in performance across the players in each group.
- The very best in each group (CVC, SWF and green investors) match up well to the top players in the peer groups (VCs, actively managed funds and energy companies), with some using their assured funding as a strength to extend the investment time horizons.
- The key difference, at least as I see it, is that within each of the funded groups, there is not enough pruning of the worst performers, partly because the funders do not or will not demand accountability and partly because the mixed mission statements allow poor performers an excuse for under performance. In contrast, the worst performers in their peer groups are quickly stripped of their funding and drop out of existence. In 2023, an admittedly bad year for venture capital, 38% of active venture capitalists dropped out of deal making. While active funds don’t have as high a drop-out rate, the amount of capital that they invest is sensitive to how they perform in market. That absence of ruthlessness on the funding level for under-performing CVCs and SWFs can trickle down to the companies they fund, with funding lasting much too long, before the plug is pulled.
Learning Moments
While this post was directed at CVCs, SWFs and green funds, there are broader lessons here for a wider class of investments.
- Funding always has to have contingencies: When companies, governments or institutions create entities that they commit to fund, that fund commitment has to come with contingencies, where if the entity does not deliver on its promise, the funding will be reduced or even shut off. To the pushback that this will make these entities short term, note that the contingencies that you put in can allow for long time horizons and long term payoffs, but the option of cutting off funding has to be on the table. After all, it is entirely possible that the funder can accomplish what they hoped to, with their under performing entity, with a different pathway.
- Have a core mission: I sympathize with those who head CVCs and SWFs, when they are faced with a laundry list of what they are expected to deliver, with their funding. Since it is impossible to run an entity, or at least run it well, with multiple missions, you have to prioritize and decide on your core mission. Thus, if you are a sovereign wealth fund, is it your core mission to invest your funding wisely to deliver market-matching or market-beating returns or is it to build a nation’s infrastructure?
- Social purpose, but with reality checks: In many cases, entities that have a business purpose are also given a social purpose, and while that is understandable, it can give rise to incentives and actions that lead these entities to fail at both. If there is a social purpose component, as there is in green investing and sovereign wealth funds, it has to be made explicit, with clear measures on how much in economic profits the entity is willing to sacrifice to deliver them. In short, claiming that you can deliver good without sacrifice is delusional, and as I have noted in my posts on ESG and sustainability, it is at the heart of the internal inconsistencies and incoherence that bedevil them.
- Failure can be a strength: In my writing on corporate life cycle, I noted that survival for the sake of survival or growth for the sake of growth will lead to outcomes that make us all worse off. As noted in the last section, the biggest weakness in the three groups is the unwillingness to euthanize underperforming entities, ensuring that good money will be thrown after bad.
As a final note, I have mixed feelings about a US sovereign fund, even though there seems to be enthusiasm for creating one, on both sides of the political divide. There are investments, especially in infrastructure, where I see a need for it, but I worry about the political interference and whether this is the most efficient way to deliver that end results that are sought by its backers.
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