Private equity (PE) and venture capital (VC) investments in Singapore, Malaysia and Indonesia have increased from US$3.2 billion in 2013 to US$10.8 billion in 2018. The most dramatic increase for such investments was into Singapore from US$883.1 million in 2013 to US$6.6 billion1 in 2018, a CAGR of over 130%. A significant proportion of this increase has been from VC investments, lead by an increased focus on new economy sectors, primarily technology and tech-enabled segments. Over the last four years, the technology sector has been one of the largest contributors to deal-making activity in the region. PE/VC investment in the region’s technology sector increased by approximately 10 times from US$672.0 million in 2015 to US$6.5 billion in 2018.1
While Southeast Asia still lags behind the U.S., China and India on alternative fund investments into new economy sectors, the share of the technology sector in PE/VC investments has been increasing. It rose from 8% in 2013 to 56% in 2018 in Singapore and from 3% in 2015 to 84% in 2018 in Indonesia. Transportation and e-commerce sub-sectors constituted the top technology deals during 2018. So it is no surprise that Southeast Asia currently boasts eight unicorns , in addition to three unicorns which have seen successful exits and several other high-growth companies vying for the unicorn status.
Impactful Trends in Southeast Asia’s PE/VC Investment and Technology Space
Dramatic Growth
- Substantial increase in the region’s ability to attract more alternative investments.
- Several new funds successfully raising capital with a dedicated Southeast Asia investment focus as well as increasing allocations from global funds to the region.
- Facilitated by governments in the region who are pushing or providing fertile ground for digitization and fintech. They are incubating tech funds and expanding into venture debt.
Blurring of Lines
- Significant overlap between PE and VC investments as well as between mergers and acquisitions (M&A) and PE/VC investments. PE investors diversifying into investments in unicorns and growth-oriented pre-profit companies.
- Several corporates are setting up corporate venture capital (CVC) investments or are directly taking VC-type minority stakes in early stage or growth companies and PE investors are doing buy-out control transactions.
Exit Options
- Asian stock exchanges have been making investor-friendly reforms to attract new economy listings as we see more unicorns emerge in Asia.
- Public investors in the Asian stock markets place more weight on profitability rather than growth, so tech companies look to private investors and global stock exchanges.
- Market volatility and competition in Asia has been slowing listings. We are seeing longer holding periods of investment or funds preferring exists through trade and secondary sales.
Geopolitical and Global Impact
- Political and regulatory changes continue to impact transactions—changes in governments, trade wars, investment and tax regulations, etc. put pressure on transactions which need to be weighed against positive factors such as growth in population, high technology penetration and availability of resources.
- Newer regulations on newer technologies—ride hailing, fintech, payments, digital tokens and more—are leading to critical changes to the outlook on value creation.
Valuation Impact
- Uncertainties in market valuations due to volatility and inherent nature of risks in early stage businesses.
- Mark-downs, down-rounds, startup failures, post-listing value erosion and other learnings from some of the global unicorns and investors could lead to market corrections in Southeast Asia.
The trends above could have a both positive and negative impact on investments in Southeast Asia. Business cycles are getting shorter and so is the life of technology. Add to this the fact that regulators are always playing catch-up with the new economy sectors by imposing regulations around licensing and price controls to protect consumers and existing businesses. All this combined may lead to disruptions and volatility.
What Does All This Mean for Alternative Fund Investors in the Technology Sector in Southeast Asia?
However challenging Southeast Asia may be, the region has become too large for alternative fund investors to ignore. Investors must reevaluate and reinvent their strategies and transaction structures from time to time for continuous value creation. Here are some additional qualitative and quantitative assessments investors can make to minimize risks and maximize returns in Southeast Asia:
- Understand the true financial health and business practices of a target company. The corporate governance environment in Southeast Asia is still evolving, so in day-to-day operations, businesses often get pushed into practices that have a direct impact on the reporting of financial results, or that expose them to fraud and corruption risks.
- New economy sectors tend to be disruptive for existing competitors, customers and other stakeholders and can result in backlash, especially when such stakeholders have robust political and regulatory influence. Investors should identify influencers and uncover their relationships with regulators and governments.
- Assess the background and reputation of the founder or entrepreneur behind the target company. The founders may have built innovative companies but may not have a vast track record that can be easily assessed, so investors must spend time understanding how the founder might be expected to behave post-investment, particularly with respect to their ability and commitment to scale up, manage the business and to maintain the governance standards that the investor expects.
- Competition for good deals is high in the region, and our advice is not to be swayed by the pressure of too many investors chasing too few deals. Take your time with the due diligence so you can be well-prepared to make a winning investment.
Southeast Asia has given decent exits to many PE/VC investors, including in the technology sector. We believe there could be many more. Investors who understand the dynamics of operating in the region can make investments with confidence and exits with pride.
