Khazanah Nasional Bhd, the government investment arm which had in the past made a killing from an early investment in Chinese e-commerce giant Alibaba, says the tech sector “appears stretched”.
That the tech sector’s valuations are overheated is not new. A number of parties have expressed such a view although there are parties who argue that this tech rally is not the same as the dotcom bubble of the past and therefore current valuations can be justified.
But when a fund with a net worth of more than RM100bil starts talking of an overheating tech sector, many are likely to sit up and listen.
Tan Sri Azman Mokhtar, the managing director of Khazanah who oversaw the US$400mil investment in Alibaba back in 2012, had given an anecdotal fact to back up Khazanah’s belief about current tech sector valuations.
It seems that the fund had made an investment in a company called Velocloud just last year.
Velocloud is a US-based startup involved in cloud-based wide area networks (WAN), those networks that span a broad area across data centres. Azman says Khazanah had managed to exit its investment in VeloCloud at a decent return within just one year. Typically private equity investments take years to see a good return.
Press reports indicate that VeloCloud was acquired by VMware, Inc, a subsidiary of Dell Technologies, just before Christmas.
The acquirer said it bought Velocloud because it is looking to expand its portfolio of networking products. This is probably the time when Khazanah exited the investment.
In a 90-minute press conference on Thursday during which Khazanah announced their 2017 review, Azman explained that Khazanah has reduced its investment in technology companies in 2017 compared to previous years.
“When we first started investing in technology companies in 2012, we were already hearing that valuations were high. So we are cognisant that we need to be careful and prudent about our investments,” he said.
Khazanah, which had invested about US$400mil in Alibaba ahead of the latter’s initial public offering, made a profit of about US$1bil after it sold some shares after the listing. It still has a 0.2% stake in Alibaba.
The fund had opened an office in San Francisco in 2013 to ramp up its investment in technology companies.
He has pointed out that the fund also comes across a phenomena called “down rounds” lately, which saw rounds of financing that value companies at less than the previous round.
“We feel quite validated,” he says of their view that the tech sector has overheated.
Nevertheless, Azman said Khazanah has invested close to US$1bil in 35 tech companies globally, after the divestment of their stake in Alibaba.
“Investing in tech is very risky, as you can imagine there are a lot of things going on with technology.
“But I am comforted and encouraged that we have made big gains on Alibaba and we have reinvested them carefully, as best as we could,” he adds.
New investments included Edotco Group Sdn Bhd, Sigfox, and Koubei, an Alibaba affiliate company; while divestments included VeloCloud, Networks Inc, Tech Mahindra and China Huarong Asset Management Co, Ltd.
In 2017, the group made a total of 14 discrete new investments totaling RM6.3bil and 12 divestments, providing proceeds amounting to RM6.4bil, with gains on divestments totalling RM2.5bil.
Azman says “lofty valuations” in the technology sector tends to be concentrated in the large platform companies.
“This means that we could find clever smallish technology companies to invest in without having to pay lofty prices.”
“For instance, Sigfox, a company based in France, which is focused on the Internet of Things, had recently signed billion ringgit deal in China,” he says.
Asked on whether Khazanah is planning to list any local investee companies, Azman said the fund is exploring this with mobile tower provider edotco as well as with integrated waste management firm Cenviro Sdn Bhd.
“It depends on the market conditions,” Azman added.
After two years of decline, the value of investments held by Khazanah hit an all-time high of RM115.6bil in 2017, boosted by surging stock prices at home and its investments in technology companies and stocks in China.