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When a country has blood on its hands, everything it touches gets a little dirty.

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Allegedly at the behest of Crown Prince , a 15-person Saudi hit squad illegally detained, tortured, murdered, dismembered, and attempted to dissolve the remains of dissident and in Turkey .

That act catalyzed a sovereign wealth crisis in venture capital and private equity that I expect to play itself out over the course of next year.

Of course, we don鈥檛 know how it鈥檚 all going to shake out, but here are some predictions for 2019:

• The Positive: Investors, founders, and the general public will continue to make associations between state-backed capital with state-sanctioned actions that run counter to their political and ethical values.
• The Cynical: No single state action, however odious, will make the entire market turn away capital from a sufficiently large sovereign wealth fund.
• The Unlikely: U.S.-led sanctions on Saudi Arabia, either under the or other law, would severely damage the late-stage funding market. However, given and between the U.S. president鈥檚 son-in-law Jared Kushner and the crown prince, such a sanctions regime is unlikely under the current administration.

Let鈥檚 unpack this a bit.

What do founders do with the money they鈥檝e raised from sovereign wealth funds represented by characters more unsavory than previously thought? What are you going to do, give the money back? Whatever hasn鈥檛 been spent has already been allocated.

And when you鈥檙e raising capital at a scale that鈥檚 worth a sovereign wealth fund鈥檚 consideration, you don鈥檛 have many other money wells to draw from.

Fund managers find themselves in the same pickle. So let鈥檚 say you鈥檙e the SoftBank Vision Fund, and it turns out that of your anchor limited partner, , is a chap who got a guy broken and butchered in Istanbul. Well, you鈥檙e probably not going to return their uninvested capital, and you鈥檙e definitely not going unwind prior investments backed, in part, by that capital. In November, TechCrunch SoftBank CEO as saying, 鈥淏efore this tragic case happened, we had already accepted a responsibility to the people of Saudi Arabia to help them manage their financial resources, and we can鈥檛 all of a sudden drop such responsibility.鈥�

But you could totally spin it as the investment equivalent of a one-time fling. Both parties could just go their separate ways. In November, Son said SoftBank 鈥渨ould like to carefully watch the outcome of the case and once the explanation is fully made then we will think about it once again.鈥� At the start of December, that the CIA is in possession of messages tying Mohammed bin Salman to Khashoggi鈥檚 murder. With the window of reasonable doubt closing, the feasibility of Vision Fund II becomes even more uncertain.

And amid all this geopolitical pressure, Softbank鈥檚 Vision Fund, and other large funds, must also prove that huge direct investments can generate outsized returns.

Model Validation & Last Grasps At Growth

The amount of capital that鈥檚 about to get liquidity through IPOs next year is truly bananas, and some of it is from direct investments by government-backed funds. Two of the most hotly-anticipated debuts, Uber and Lyft, have both received direct backing from government sources.

Here are some predictions for how the market might react:

• Validation: Favorable exit multiples generated from direct investments in late-stage technology companies will validate that investment strategy.
• Replication: Attempting to chase others鈥� success, other sovereign wealth funds, which may not have previously invested in venture at all, will make their first direct investments in private technology companies in 2019. Longtime investors will accelerate capital deployment.
• Desperation: As global economic growth slows down toward the end of a historic economic growth cycle, large fund managers may attempt to goose returns by investing more in high-growth private technology company equity.

Granted, all the above assumes that public markets remain reasonably stable. To be fair, this is shaping up to be a pretty big assumption. If 2019鈥檚 ticker tape reads like Q4 2018, all bets are off.

Global Influence In Global Markets

Giant venture rounds led by government-backed entities like the Vision Fund, , , and others have already bent the shape of private-market fundraising for founders and venture funds alike, as we鈥檝e covered extensively in the past.

To the extent that the market is in a bubble today, sovereign wealth has helped to inflate and prop it up. Deep-pocketed SWF investors have helped to reshape private markets like VC, but it鈥檚 also influenced public tech companies this year.

To that latter point, 鈥攚ith Saudi backing which ultimately beyond in the electric automaker鈥攁s an example of sovereign wealth bending the public market upward.

Musk’s infamous “funding secured” tweet and on August 7th, followed up by that expressly mentions Saudi interest in financing the over $70 billion take-private transaction, bumped up the price of Tesla shares. Even though the Public Investment Fund in leading the buyout, the specter of possibility loomed.

At the same time, it鈥檚 also possible that the influx of sovereign wealth will drown the venture market. The academics mentioned earlier鈥擪ing鈥檚 College London lecturer and Harvard postdoctoral fellow 鈥攑oint to other late-cycle surges of sovereign wealth, in other financial markets, as a cautionary note.

At this stage of the venture market cycle, direct investment at SWF scale is kind of like an intoxicatingly delicious high-proof beverage your friend brought to New Year鈥檚 party that鈥檚 already been raging for a few hours into the morning. It鈥檒l be the last thing everyone remembers before waking up with a hangover, wondering what鈥檚 left that awful taste in their mouths.

Last bet: Most of 2019 will go by in a blur. 2020 will be the moment of reckoning.

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