SoftBank’s high profile $100 billion Vision Fund is generally considered to be the world’s biggest tech investor. However, there is another investor that has been quietly hoovering up minority stakes in promising technology companies around the world.
And the value of those investments is now thought to be approaching that of the Vision Fund portfolio. The continuing pace of acquisitions also means that this dark horse technology investor may well soon surpass the Vision Fund as the world’s biggest tech investment portfolio. The tech investment portfolio in question belongs to Chinese mobile giant Tencent.
Tencent Investments Are Diversified Across Tech Sectors and Geographies
Tencent now holds minority stakes in over 700 tech companies internationally. Bernstein Research estimates the total value of Tencent’s portfolio at around $70 billion. The Vision Fund recently announced it has already invested around $70 billion of its $100 billion in capital. While that doesn’t calculate the current market value of the fund’s equity stakes, many are with a longer time horizon for returns and the portfolio’s value is probably not yet much higher than sums invested. It’s difficult to make an accurate calculation but it very much looks like Tencent is catching up and may well soon overtake the Vision Fund’s value.
Tencent’s success has been founded on its WeChat app, which is China and the Chinese-speaking world’s dominant social media platform. While nominally a messenger app, WeChat is a far more developed ecosystem than any Western messenger. The platform supports payments, through WeChat Pay. As well as bills and personal transactions between individuals, WeChat Pay also facilitates the integration of a rich ecommerce offering through WeChat, as well as mobile gaming, ride hailing apps, streaming services, media content and pretty much every other mobile technology trend of any note.
‘Feeding the Empire’
Most of WeChat’s investments are in tech companies whose products or services can be integrated into and sold through the social media and its payments platform. It’s a win-win. The companies Tencent invests in get access to a huge audience only a partnership with either Tencent or Alibaba can realistically provide in China. For its part, Tencent continues to ‘feed the empire’, by bolting an ever increasing range of monetisation channels onto WeChat.
The majority of Tencent’s acquisitions are in China (estimated at 30%-40%), South East Asia and India but the company is increasingly looking to expand internationally. At least for now WeChat doesn’t have any meaningful social media market share in the West but medium to long term that is the ambition. And if WeChat itself doesn’t take off in North America and Europe then the company’s interest in influential tech companies in this part of the world will still offer it a strategic position and market access.
Flagship investments in Western tech companies include the recent acquisition of a $150 million stake in messaging board Reddit and electric vehicle manufacturer Tesla. The latter is also a door into the future autonomous vehicles market in the West, which is developing in parallel to China’s. Different companies expected to dominate the two geographical markets with little crossover. At least over the market’s early phase of development. Stakes have also been acquired in Fortnite developer Epic Games and Finnish mobile games developer Supercell. Fintech is another area of strategic interest and Tencent holdings include Brazilian banking app Nubank and Vogager, a Phillipines-based offshoot of local telecom firm PLDT.
Some analysts comment that Tencent’s aggressive investment strategy should come as no surprise. The company’s president, Martin Lau, was previously an M&A banker at Goldman Sachs. James Mitchell, Lau’s chief strategy officer is also a Goldman Sachs alumni, where he was an equities analyst. Goldman Sachs bankers have a reputation for an M&A approach to business development. The two are also behind Tencent’s international ambitions, particularly the sometimes tricky strategy of investing in high profile Western tech companies.
As well as fuelling continued growth, Tencent’s investment strategy also has a defensive element. By leveraging its current cash-rich position to buy into any potentially promising new digital monetisation model, Tencent neutralises the risk of losing future relevance, overtaken by new players. International expansion spreads risk from a local Chinese environment of tighter regulation and less support of tech companies.
Last year China’s government froze the issue of new licenses for mobile games amidst worries that they have become too great a distraction, especially for younger generations. Tencent is heavily invested in mobile gaming for the Chinese market and a nine-month freeze on new gaming licenses hit its stock price hard. An estimated backlog of 7000 games waiting for licenses built up. Tencent titles were also not among the first batch to be issued licenses when the State Administration of Press and Publications started to wade through the backlog. It was the fourth list of new titles before two Tencent products were issued licenses.
This suggests some level of tension between the company and local authorities, who are keen to remind China’s biggest companies, particularly in the technology space, not to rise above their station and to remember who is boss. Tencent will want to avoid rocking the boat too much while still diversifying out of China as a safety net.
But it’s more complicated than that. China’s regime, while keen to keep country’s rapidly growing conglomerates in their place and make sure they don’t start getting too big for their boots, simultaneously encourages the kind of international investment in tech start-ups Tencent is pursuing. It helps push forward the country’s ‘China 2025’ 10-year plan, a central pillar of which is global tech dominance.
While there are obviously tensions between the support and encouragement from the Chinese state and its periodic power plays, at least for now Tencent is successfully walking the tightrope. There is mutual interest. China wants more global economic influence and a large part of that is exporting its best companies. From the point of view of those companies, international expansion offers a buffer to how much their fortunes rely on changing political interests and sentiment.
The Bottom Line
From a purely business point of view Tencent’s approach appears to be bearing fruit. A recent Financial Times article puts the overall market capitalisation of the companies Tencent has a holding of at least 5% in as having surpassed $500 billion. Tencent’s own market capitalisation, despite a partial recovery from the disaster 2018 represented over the early part of this year, is around $420 billion.
The company’s ‘other’ businesses unit which includes its start-up investments as well as its Cloud and payments units, saw annual year-on-year growth of over 81% for the last quarter of 2018. It now accounts for 24% of its top line revenue. Until recently, the majority of Tencent’s revenues came from gaming but that dropped to 34% last year, hit by the Chinese freeze on new licences. The trajectory is clear and it would be a surprise if ‘other’ does not overtake gaming interests over the next few years.
Tencent’s growth strategy is now definitively founded upon M&A. It’s investment portfolio is twice the size as that of Alibaba, its biggest competitor in China. Outside investments made by U.S. tech giants such as Facebook and Alphabet don’t even come close. Critics call Tencent’s strategy a weakness and proof the company has raised the white flag when it comes to big ambitions to expand organically. Lau counters that trying to cover all of the exciting new tech opportunities and trends in-house would amount to delusion rather than ambition.
The Future of Tech
The tech landscape of the next couple of decades at least seems set to be shaped by pressure released by the coming together of the immovable objects of the giant tech companies of the USA (FAANGs) and China (BATs). The biggest tech investors, like Softbank’s Vision Fund and backers such as Saudi Arabia’s sovereign wealth fund, will also have an influence. They are all largely competing for the same start-ups and seeking a foothold in the same promising new verticals.
These players have become the tectonic plates upon which the technology sector rests. Their movements will create a new technology landscape but that process will inevitably also feature destruction. Tencent appears to have chosen its path now and it is one of acquisition and diversification. How it will match up to the other great tech forces shaping the world of the future remains to be seen.