ASX-listed Fatfish Internet Group is of the view that exits via initial public offers (IPOs) in the Southeast Asian technology space have been lacking due to private capital market valuations that public capital markets are unable to support.
In a report that tracks technology IPO activity from 2004 to 2016, Fatfish observed that despite the growth of venture investments in the region over the last few years, its public equities market could not match the exit architecture of more mature technology markets in Asia such as Japan, South Korea and China.
According to Fatfish, with investors and entrepreneurs in the region pushing valuations to levels that are ‘difficult to support from a business fundamentals perspective’, Southeast Asia public equity markets are ‘practical and unlikely to support very rich valuations’ and ‘driving many startups with high valuation to remain private longer, rather than pursuing a public listing’.
It adds, “We firmly believe that IPO is not an alternative path but a mainstream avenue for successful tech companies –the world’s most valuable and sustainable tech firms (e.g. Apple, Google, Tesla, Facebook, Baidu, Alibaba, Tencent, Amazon, Microsoft etc.) largely belong to this publicly traded category.”
The report noted that technology IPOs in Indonesia and Malaysia have outperformed other ASEAN nations, with overall tech IPOs declining since 2004 but recovering in the last few years. Meanwhile, Thailand’s listed technology enterprises showed “consistent large IPO market caps with potential big outliers”.
Across the six countries compared, tech companies listed in 2007 saw the largest increases in market capitalisation, which it attributed to a “starting non-demanding valuation during the global financial crisis period of 2007-2008.”
In Q3 2017, a powerful combination of stable economic growth, supportive government policy and strong equity markets generated another strong quarter for Asia-Pacific IPOs. But median deal size, at $47.5 million, saw IPOs in the Asia Pacific remain lower than the global average. In terms of technology listings, the bourses of Malaysia and Indonesia have emerged as the strongest performers for the 2004-2016 period.
An impactful IPO in the region has been the listing of the O2O e-commerce startup venture Kioson, the first Indonesian startup to list on the IDX. Given the size of the Indonesian economy and its established performance as a technology listing platform, it is likely that startups with a strong Indonesia focus will continue to list in Jakarta.
Information compiled by Fatfish indicates that technology companies listed in 2009, 2010 and 2015 show an overall increase in market capitalisation, with technology IPOs seemingly performing better relative to its neighbours.
In an official statement, chief executive Jasin Halim stated: “Kioson’s IPO is an important milestone for the Indonesian capital market because this is the first time retail investors can invest in a tech startup. We thank all parties that have participated and helped Kioson during the IPO process. The success of this corporate action can set a precedent for other startups to consider IPO as alternative fundraising.”
According to data compiled by EY, IPO activity in Southeast Asia and the broader Indo-Asia Pacific would be supported by the continuing recovery of the global economy, as well gaining from the relative weakness of the US dollar, which would stimulate the flow of capital into Asia-Pacific’s emerging markets.
Southeast Asia has seen stronger investor confidence, due to the growth of global and the emerging market economies of ASEAN, which are posting growth rates ranging from 2 per cent to 6 per cent. IPO activity is expected to remain steady in H2 2017 and be particularly strong during Q4 2017, despite entrepreneurial ventures looking to access public capital markets despite expectations of lower valuations.
According to EY, the IPO pipeline in Southeast Asia is likely to be led by Singapore, Indonesia, Thailand and the Philippines, with substantial activity among technology and, more specifically, financial technology startups, suggests strong prospects for future IPos in the medium term, as many of these firms still need time to mature, with time needed to establish themselves and scale.
Notably, the listing of Sea Ltd on the NYSE in an $800 million IPO could highlight the region’s burgeoning but underestimated technology sector and boost investor confidence in the region, with funds able to secure greater commitment from limited partners to invest in the region.
However, investment in Southeast Asia lags behind China and India – which are more mature in technology ecosystems – with the possible downside from such an IPO being that pressure to satisfy overseas shareholders could see SEA Ltd dilute its focus on developing its core competencies and footprint in Southeast Asia.
Additionally, its comparison to Chinese Internet major Tencent Holdings may see it struggle to reach a $4.45 valuation for its IPO, given its nature as a pre-profit tech stock. It operates as a test case for those technology ventures within the region pursuing a public listing.
In an interaction with Bloomberg, Nicholas Teo, a trading strategist at KGI Securities Singapore, explained: “This is one of the challenges of these big, high-profile private companies, including Grab and Uber. Once they are subject to public market scrutiny, it’s possible they will be sold down below their private market valuations.”
In response to the report, Mohamed Nasser Ismail, Head of Equity Capital Market (SME) and Head of Capital Market Development at the Singapore Exchange (SGX), which has seen a strong rebound in its IPO performance this year according to data compiled by EY, commented: “As Singapore forges ahead with its Smart Nation and Fintech initiatives, we expect a growing number of emerging and disruptive technology companies to be born and based out of Singapore.
“SGX has over the years built a strong cluster of technology companies throughout the evolution of tech cycles. From the listing of contract manufacturing company Venture Corp over 20 years ago, we recently welcomed the listing of Y-Ventures, a data analytics company, indicating a shift in the type of tech companies that are listing on SGX. Investor interest in Singapore-listed technology stocks continues to be robust, with the sector chalking up one of the highest market returns in Singapore year-to-date.”
“Our collaboration with like-minded organisations such as IMDA and A*STAR is one of the ways SGX seek to deepen the vibrant technology ecosystem in Singapore. Meanwhile, we are also working with the industry to improve access to capital in the private space for technology companies that may not be ready for a public listing.” he added.
More recently, the stock exchange has entered into a collaborative listings pact with the NASDAQ, which will help Asian firms first list in Singapore as a springboard before easing into a listing on the NASDAQ. The partnership comes as both exchanges grapple to build their listings pipeline and attract growth-stage enterprises.
Commenting on the viability of the SGX as a technology listings platfor, Vishal Harnal, the General Partner at 500 Startups in Singapore, said, “Increasing sources of liquidity and access to capital for entrepreneurs is a good thing. I don’t think the aversion by founders to list (if any) is attributable to public market appetite for seemingly high private valuations. It perhaps has more to do with the fact that companies need to reach a certain size before it becomes attractive to list from a cost and compliance standpoint.”
“Also, startups tend to prioritise rapid over sustainable growth – the public markets may not be the best source of capital to spur that early on in the company’s development but becomes more appropriate as the company matures.”
As for the trend of a number of Southeast Asian and international startups, some from Silicon Valley, seeking to list on the ASX at an early stage in their lifecycle? Harnal elaborates: “The challenge for local exchanges is in attracting top-quality companies from the region away from the main global technology bourses.”
Harnal also forecasts that the listing of Kaison on the Indonesia Exchange (IDX) in Jakarta, while a positive sign, is unlikely to attract startups from outside Indonesia to list there, though he notes that this has the potential to change over time.