Investments: Rethinking the Allocation of Capital
Finding Outsized Returns in Today's New Stack
A little over three months ago when I introduced the New Stack, I explored several considerations about the importance of deep and liquid financial markets for the competitive advantage of companies and countries in today’s world.
Since writing that Substack, I’ve been speaking with leading global investors in both the private and public markets. Our conversations have surrounded how they think about making decisions in these times of rapid change, today’s concentrated technical and financial returns, and in some cases, how their charters as venture capitalists, sovereign wealth investors, or public equity and debt providers drive their strategies.
As the discussions have unfolded several trends have emerged which shape how these leaders approach investment opportunities and where they believe they can find alpha (financial returns higher than the general market) for the people whose money they manage.
Three themes stood out in the interviews: 1) The scale and concentration of outsized returns, 2) The interconnected nature of their investments in commercial companies which require direct ties to government and country interests, and 3) Their awareness of government goals and activities, and how those needs are linked to investment opportunities.
Investing right now is about more than just finding a company with a great product in a compelling market. It is about understanding how that company fits into the global context which determines the size of the opportunity.
The Big Get Bigger
In both the public and private markets, the concentration of market capitalization, revenues, and profits is staggering. The top 10 S&P 500 companies currently generate about 35% of the earnings and 41% of the value of the whole group (more than two-times larger than 10 years ago).
https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/how-extreme-is-market-concentration/
https://www.commonfund.org/blog/the-new-era-of-market-concentration
This level of concentration is also a reality in the private markets. AI received 80% of global venture capital funding in Q1 of 2026, and 65% of all venture funding went to just four companies (OpenAI, Anthropic, xAI and Waymo).1
https://news.crunchbase.com/venture/record-breaking-funding-ai-global-q1-2026/
One VC, who happens to be one of the most successful in the history of venture capital, shared a particularly stunning comment: He believes the top engineers in the world will largely go to work for the very few AI winners, and they will do so mostly in the San Francisco Bay Area. Market data shows that a top software engineer will make almost $800,000 per year at some of the these companies, and reports were widely circulated that some pay packages came in around $100 million per year for the very top of the top.
From this VC’s perspective, the idea that a company can build out a development center in a lower-cost part of the world, hire “B-level” engineers and pay them 25% of the wages in the United States doesn’t work anymore. He argued the thesis that “The World Is Flat” has faded into the past, and the concentration of talent, opportunity, capital, and wealth are becoming increasingly focused in a few key geographies and companies in which he should invest.
Investing in Opportunities that Require Government Engagement
For many years investors (especially VCs) used to avoid companies that required government engagement/approval to ship products or where the government was the customer.
Now that has all changed.
For a brief window in the early 2000’s many Silicon Valley venture capital firms sought to diversify their opportunities by adding investments in life sciences to traditional computer science. Over time, the benefits of specialization and larger returns concentrated in computing technology caused most of these funds to either split into separate partnerships or shutdown their healthcare practices.
One criticism of healthcare investing was that requiring government regulation to approve a product — be it in medical devices, diagnostics, or therapeutics — was bad. “If you need the government to approve your product,” the thinking went, “it added too much risk vs. simply shipping an app or a new piece of SaaS software.”
Similarly, developing products that served the military was frowned upon not only for a politically progressive San Francisco Bay Area, but also because the time to get approval to sell to the government and building relations with government procurement systems.
Recent investment thinking has massively changed.
Defense tech startups received $49.1 billion of venture investment in 2025, up from $27.2 billion a year prior. Wars in Ukraine and the Middle East have shown a need for new types of technologies and combat, and the existing military defense infrastructure has revealed itself as overpriced and slow to respond to 2026 realities.
Energy and climatech investing grew 8% in 2025, which is slower than AI investing but higher than other areas. The global need for energy is continuing to attract attention and capital. What has changed, according to Sightline Climate, is that corporations and governments are now becoming some of the largest and most active investors in private companies:
As the head of one of the world’s largest Sovereign Wealth Funds (SWF) said to me, energy investing is critical for a country, and financial investors cannot achieve success on their own due to the amount of capital required for many of these investments and the time it takes to generate large returns. Governments need to partner with investors due to the huge capital expenditures involved and the effort required to get to commercialization of new technologies at scale.
How Government Goals and Investments Are Shaping the New Stack
Government and national goals (security, defense, energy, etc.) are currently intertwined with some of the most active areas in the private sector. In today’s world we are seeing this play out in some new and unique ways on the investing front.
Semiconductors, LLMs, and Clouds are National Chokepoints — In a previous post I talked about how size is a necessary competitive advantage in today’s world.
One country that has embraced this strategy in the semiconductor and AI sectors is South Korea. The country recently announced a plan to invest $880 billion in semiconductors, AI, and robotics with government support alongside investments by national champions Samsung and SK Hynix. The capital will include the creation of chip factories, data centers, and energy production to serve these facilities. This massive public/private cooperation is a visible statement to the entire world about the country’s determination to be at the forefront of these key competitive areas.
SK Hynix recently tapped the US stock market for capital by performing a $26.5 billion raise on Nasdaq last week. The company is aggressively playing to win, and the capital will serve as a barrier to entry for others seeking to compete.
Government and national interests in technology (AI), military systems, semiconductors, and energy are aligning with the concentration of revenues and profits of the world’s more valuable commercial entities, in ways and at a scale that we have not seen previously.
Mario Draghi, the former Prime Minister of Italy, former President of the European Central Bank, and author of the Draghi Report, highlighted the importance for Europe of having large globally competitive companies. As reported in the Wall Street Journal:
At its core, Draghi’s strategy is about creating conditions for globally competitive companies to emerge. Where there is government resistance, the private sector is starting to take matters in its own hands, he said.
“You see an extraordinary dynamism by the private sector that is actually making partnerships, joint ventures, mergers and so on,” Draghi said in an interview. “Basically, because the private sector has now very clearly understood that without scale, they have no future.”
The Growing Sophistication of Sovereign Wealth Funds — In the last decade we have seen the development of SWFs in ways not previously experienced. These organizations are playing a key role in investing in business far beyond the fiscal policy of governments.
Firms such as Temasek in Singapore (over $430 billion in assets), ADIA in Abu Dhabi (over $1 trillion in assets), Mubadala in Abu Dhabi (over $380 billion in assets), and the Saudi Public Investment Fund ($900 billion in assets) are bringing unparalleled capital and investment sophistication to financial markets. While two-thirds of SWF investments are in public entities, and many of these institutions have historically served as Limited Partners for various private equity and venture funds, in the last few years there has been an increase in direct and co-investment deployments. Almost $2.5-$3.0 trillion of SWF investments are now done in private companies via direct or co-investments:
https://www.bain.com/insights/the-future-of-sovereign-wealth-funds-four-imperatives-for-the-next-decade/
The level of sophistication of the investment personnel in SWFs is now rivaling top investment managers in PE and venture capital, and is enabling access to high quality deals without having to pay management fees and share investment returns with General Partners of VCs or PE managers.
Smart governments are not only supporting key sectors with policy decisions, but they are also investing sophisticated capital into critical areas and companies.
NB: It is worth noting that while some funds need to balance investment returns with dual-mandates (e.g. country employment, infrastructure development, etc.), the amount of capital under SWF management (~$15 trillion) is shaping global business and financial markets to an unprecedented level.
Also, history is renowned with times when governments supported and were intertwined with private industry — perhaps most notably with both the British East India Company and the Dutch East India Company.
We are entering another epoch where this is true once again.
Governments Must Consider Both Social Cohesion and Unlocking Capital to Fund Growth — One of the challenges of dual-mandate Sovereign Wealth Funds is that they must balance financial returns with national development by creating jobs and infrastructure. While this dual mandate benefits a country on more than just a returns perspective, as the CEO of one SWF told me, it creates operating and political tension inside of a company and country. Executives in SWFs are sometimes forced to confront both financial and societal tradeoffs that create cross-pressures which pure financial investors or operating executives in commercial organizations do not have to face. This leader also highlighted that these tensions become acute when people inside of his organization don’t understand the political constraints of the government, and conversely when government officials are not fluent with investing dynamics.
In addition to managing this cross-pressure, countries need to think about developing deep and liquid capital markets.. Tom Tugendhat, a Conservative Member of Parliament, wrote an opinion piece in The Sunday Telegraph about how policy changes in the early 2000s prompted UK pension funds to move money away from “holdings in listed UK companies and instead into bonds…” Tugendhat argued that this switched “live money” — money that supports ideas, hires teams and changes the future — to “dead money” loans made to the state to support spending and government programs. He argued that this has drained the country’s pools of finance to less productive assets.
Tugendhat argues that reforming pension funds and creating incentives to invest in growth areas would align with national interests by having citizens invest in companies that historically have delivered higher returns and created more jobs than government spending.2
It isn’t enough for a country to have wealth — it needs to invest that wealth into productive and growing assets to stay wealthy.
Key Takeaways
Company and Country Investing Interests Have Never Been More Intertwined — The sources of today’s commercial profits are concentrated increasingly in companies whose products and services are intimately tied to national interests (AI, semiconductors, energy, defense, etc.). The laissez faire strategy of a private sector that operates successfully and independently of government does not align with today’s global challenges and realities.
Note that this does not mean that governments should control the means of production (something that has historically never worked well). Rather, it requires engagement and integration given the nature of where so many investments and technical/commercial growth are happening.Beyond Policy, Countries Need an Investment and Financial Strategy to Build Agency and Resiliency — Nations require a financial/investment strategy at the country level which ensures capital is deployed into key sectors that promote national interests and competitiveness. To deliver this capability includes not only bringing in top talent into government organizations such as Sovereign Wealth Funds, but also ensuring that latent capital in a country can invest in competitive industries that create wealth and jobs and not just fund government entitlement and social service expenditures. Incentives around tax policies can also support this goal.
Being a wealthy country is not enough. Being a competitive country is required to guarantee wealth for both current and future generations.
https://www.digitalapplied.com/blog/ai-venture-funding-2026-where-242b-went-data-atlas#record-quarter
Tugendhat, Tom. “Reforming pensions would make us less in hock to China – here’s how.” Telegraph.co.uk. (18 Jan 2025)