DSA Summit: VC players predict $500m exits via M&As in Southeast Asia

Southeast Asia will see more acquisitions in the range of $500 million as the region continues to be an attractive market for expansion, venture capital industry veterans said at DEALSTREETASIA’s flagship event Asia Private Equity-Venture Capital Summit 2017 held in Singapore last week.

The observation is largely based on the growth of Southeast Asia as a vast regional market  and aggressive expansion by global players.

“If you look at majority of exits in Southeast Asia, they are usually not by companies in the region but global players from China, US, Europe or Australia looking to acquire in the region with the exactly same business model as themselves,” said Patrick Grove, co-founder and CEO of Catcha Group.

It was much more difficult to explain investing in Southeast Asia to a US or Chinese investor five years ago, when the region was a small market with only 15 million smartphone users, according to the Malaysian Internet company founder. “The interest in Southeast Asia keeps growing and growing. Today, it is a different conversation with 300 million smartphones.”

More than 43 per cent of M&A deals in the region were struck by non-Southeast Asian companies over the past decade, according to a research by Singapore-based Golden Gate Ventures.

Even as the ecosystem is still nascent, it is not just creating a lot of hype but people have started to see the value and benefits that tech startups are bringing to their respective countries and the entire region.

From the VC side, there is also an increasing interest from LPs to invest in such alternative investments.

“There’s a lot of liquidity in the market. It is not too difficult to allocate $5-10 million to a venture capital fund,” opined Abraham Hidayat, managing director at Skystar Capital, an Indonesia-focused VC firm.

Trade sale more realistic

As LPs allocate their funds into VCs, the expectation is often for a 30-40 per cent IRR, according to Kuo-Yi Lim, managing director of Monk’s Hill Ventures. But if VC firms are just looking at the multiples, it is not the best use of capital. Meanwhile, the question is how investors create a path for invested companies to become big and deliver the returns that VCs should get in Southeast Asia.

“It’s always an easy composition to have when you are cutting the check back to your LPs,” said Hidayat. “But overall, the big picture is that you’ve got to be driving portfolio level venture return.”

Moving forward, the region has both human capital and financial capital and macros in place to build big companies in, Lim added.

When it comes to the exit options, the venture capitalists agreed Southeast Asia is a strong market for M&A and trade sale, while IPO is seen as more of a fundraising event.

Indonesia might be an exception because tech companies are more encouraged to list due to the country’s tax incentives. While the tax on capital gains through M&A is 30 per cent, companies will enjoy only 1 per cent rate if they list.

Blume Venture Advisors’ Nath predicted that M&As would comprise two-thirds of the region’s exit deals. In India, valuation had come down over the past two to three years, and the pressure for the firm in the next three years would be to realize exits, he added.

However, the challenge to corporate acquisitions is the proliferation of VCs in the region. If five years ago, an entrepreneur built his business with the only solution to sell out to the number one player in the field, it is now “more expensive to consolidate market share” because the smaller players can get VC funded, said Catcha Group CEO Grove.

Also read:

Are exits the main entry barrier for VC in South & SE Asia? Industry execs weigh in

Meaningful exit is primary need for Asean startup ecosystem: Justin Hall, GGV