Private equity (PE) firms, which typically make late-stage investments, are increasingly foraying into the ‘venture space’ and doling out smaller cheques to emerging businesses in Southeast Asia.
“We’re very comfortable writing a cheque of $30 million, $40 million, $50 million, as long as you have a clear path to put meaningful capital into that opportunity,” said Warburg Pincus managing director and Southeast Asia head Jeffrey Perlman at DealStreetAsia’s Asia PE-VC Summit 2019 held in Singapore.
“You can write a $20 million cheque and get 20 per cent of a company or wait nine or twelve months and write a $100 million cheque for 20 per cent of a company,” he added.
Warburg Pincus, which recently closed a $4.25 billion Southeast Asia and China fund, focuses on investments in growth companies with a scalable and sustainable business model. However, the firm has also made investments in loss-making tech companies such as Indonesia’s Gojek and OnlinePajak.
The US-based PE firm is not the only one to focus on the startup market dominated by venture capitalists so far.
PE firms are increasingly joining the bandwagon, including prominent names such as TPG (PropertyGuru), Equinas (MediExpress), Temasek (Zilingo, Sociolla) and KKR (aCommerce, Voyager).
One of the pioneers of this increasing trend has been regional PE firm Northstar, which was one of the earliest investors in Gojek. It injected an initial capital of $800,000 in the decacorn’s earliest funding round.
According to Northstar managing director Bert Kwan, investing small amounts into tech companies involves a different logic in terms of investments.
“It means we have to take the view that our capital is going to go in, the return on capital is going to be high and when the company goes and raises additional capital, it will still make sense for us to top up, and also makes sense for others to support that business model, and so it’s a slightly different way of thinking about the type of investments,” he said.
Jackson Chiam, director of Singapore-based PE firm Apis Partners that has invested $21 million into Malaysian payments service provider GHL Systems, says that investing in loss-making tech companies could be deemed to have “excessive risks” by investment committees and LPs. PE firms could minimize the risk, he said, by not using money deployed directly from its funds for such investments.
“From a portfolio construct perspective, from our exits, we can actually recycle some of that capital – from that perspective we could actually do smaller deals with higher risks,” he said.
For PE firms wanting to have a stake in tech startups for strategic purposes without having to compromise its investment mandate of investing in profitable companies, this can be done through a venture build strategy by an existing portfolio, according to Tak Wai Chung, partner and Southeast Asia head of EQT Partners.
For EQT, which only invests in EBITDA-positive businesses, “we have actually intentionally created loss making subsidiaries within good businesses. This is because we want to capture some of these digital opportunities. By doing that you make that company sexier,” said Chung, whose firm is an investor in SG-based corporate services provider InCorp.
For most PE firms, however, smaller investments in tech companies are done with direct returns in mind. While such investments may command high IRR and provide a good portfolio mix, it would not be realistic for PE firms to be making many such investments in the venture space from a single fund, the panel agreed.
Cutting too many small cheques will mean having to devote time and attention to many entrepreneurs, which will not be financially sensible even if a fund achieves commendable returns on a number of these investments.
“In a $15 billion fund in China or Southeast Asia, if you make 10x on a $10 million investment, it looks nice on paper but it doesn’t really move the needle in the context of the returns to our investors,” said Warburg’s Perlman.