Southeast Asia is fast becoming a go-to destination for global private equity (PE) firms chasing investment opportunities in the technology sector.
Over the last two years, a number of factors — from the region’s accelerated internet adoption to the Sino-US trade war, which rerouted investments meant for China to Southeast Asia — have drawn the attention of more PE firms to the region.
“Investors who have been historically focused on China are looking for venture exposure to Southeast Asia,” said Vincent Ng, partner at the placement agent and advisory firm Atlantic-Pacific Capital. Global tech majors like Apple, Google, and Amazon have said they may move their production lines to markets like Vietnam, Thailand, or Indonesia.
Moreover, around 70% of the population in the region uses digital services and the internet economy is expected to grow to $300 billion by 2025, tripling from 2020.
Consequently, there were at least 11 PE deals in the tech space in 2019-21, according to data compiled by DealStreetAsia.
The trend marks a U-turn from 5-7 years ago when most of the PE funding in the region went to traditional sectors such as real estate, FMCG, education, healthcare, or business services. At the time, PE deals in tech companies were few and far between with only rare instances such as General Atlantic’s investment in Sea Limited (2014), or KKR’s and Warburg Pincus’s deals with Gojek (2016) to speak of.
PE tech deals in SE Asia since 2019
|Company (Sub-sector)||Country||PE investor(s)||Other investors||Funding amount||Funding round||Year of investment|
|Indonesia||General Atlantic||$55M||First institutional round||2021|
|Indonesia||L Catterton||NA||Post-Series E||2021|
|Indonesia||L Catterton||Sequoia Capital India, RTP Global, Partech, TNB Aura, Seeds Capital, FEBE Ventures||$40M (L Catterton paying $25M)||Series B||2021|
|Singapore||Polaris Partners, Invus||6 Dimensions Capital, WuXi ApTech, EDBI, Baidu Ventures, others||$43M||Series A||2021|
|Vietnam||Warburg Pincus, Macquarie Capital, Affirma Capital||Goodwater Capital, Kora Management, Tybourne Capital Management||$100M+||Series D||2021|
|Singapore||Warburg Pincus||NA||Post-Series C||2020|
|The Philippines||KKR||PLDT Inc, Tencent, IFC||$120M||Third institutional round||2020|
|Singapore||KKR, TPG||$220M||Post-Series D||2020|
|The Philippines||Warburg Pincus||$250M||First institutional round||2019|
|Indonesia||General Atlantic, others||GGV Capital, others||$150M||Series C||2019|
|Vietnam||TA Associates||NA||First institutional round||2019|
Investors in the region are also sitting on an unseen level of available dry powder, with 25 Southeast Asia-focused funds in the market looking to raise $5.8 billion and 26 APAC funds with Southeast Asia allocations seeking $58.8 billion, according to DealStreetAsia’s Private Equity in SE Asia Report released in February this year.
As the fresh capital seeks out opportunities, PE investors are diversifying sector-wise. “A lot of big [PE] groups with a big AUM game are building up new strategies to capture different opportunities in both bigger and smaller deals, and niche sectors. That trend will continue,” Ng said.
The tech experiences in more advanced markets like China and India “have shortened the learning curve for Southeast Asia, resulting in an attractive risk-reward profile for investment,” noted Chee Yann Wong, managing director and member of the investment committee at Northstar Group, an investor in Indonesian ride-hailing giant Gojek.
“The digital ecosystem in Southeast Asia is scaling significantly and appears to have reached an inflection point. There are now many tech companies in which global PEs can invest sizeable amounts,” he added.
Early-stage, small ticket
Among global PE firms scouting for deals in the region is the Partners Group.
The Switzerland-based PE, which has $109 billion in assets under management, is planning to allocate 15- 20% of its global tech investments to opportunities in Asia, said Cyrus Driver, the firm’s managing director, private equity technology. The firm plans to focus on SaaS, financial services, and classifieds companies in this region.
The consumer-focused PE group L Catterton is also turning away from pure brick-and-mortar investments to tech-enabled targets. The move is being spearheaded by Anjana Sasidharan, a former Sequoia Capital executive who joined the firm as head of India and Southeast Asia for growth-stage investments in February.
The global PE firms are eager not to miss out on the next big tech bet. “In this part of the world, we want to be able to bet on the right companies earlier than in Europe,” said Raphael Thiolon, executive director of Belgian investment group Verlinvest, which invested in Lazada in 2013 and then exited the online marketplace to Alibaba in 2016.
Investors, therefore, have been looking to tap opportunities in relatively early stages. As the region’s tech ecosystem comes of age, global investors have felt the comfort to go in early and back businesses for a longer period of time.
“Some regional VC funds who typically do seed or Series A deals have started opportunity funds to invest in the Series B stage, and there are PE funds who’d rather invest in Series C or Series D now go a bit down to Series B or even Series A. At the end of the day, both VC and PE go where the opportunities are,” said Olivier Raussin, co-founder and managing partner of FEBE Ventures, which invested in the Singapore fintech firm Zenyum along with L Catterton earlier this month.
The ticket sizes, though, are still small by global PE deal standards.
“We have a separate pool of capital to pursue a range of opportunities… including investments in the sub-$100 million range,” a spokesperson for KKR said. The firm operates technology funds dedicated to growth-sized opportunities worldwide. In March last year, DealStreetAsia reported that KKR was looking to raise at least $750 million for its first Asia-focused tech fund.
The firm proved its tech appetite in Southeast Asia through investments in Indonesia’s Gojek, Philippines’ Voyager Innovations, and Propertyguru in Singapore.
The promise of exits
While exits, in general, have been one of the biggest concerns for PE investors in Southeast Asia, the region’s tech sector has made headlines for its huge exit potential. And that has boosted the confidence of Southeast Asian investors, Bain & Company’s executives said in a recent online event.
Around 12 months ago, it was thought that Sea Limited was an odd success in terms of listing and growing post-IPO.
Now, Grab is looking at a listing in the US after merging with Altimeter SPAC this year. Its Indonesian peer Gojek has merged with local e-commerce player Tokopedia to form GoTo, an entity with a valuation close to $40 billion. The aim is to list GoTo in Jakarta and the US.
Another PE-backed firm going for a listing via the SPAC route is proptech firm Propertyguru, which could pave the way for a future exit for investors TPG and KKR.
Even before the peak of the SPAC phenomenon, Philippines-based Converge ICT generated a partial exit for Warburg Pincus and Canadian pension fund CDPQ through its $600-million IPO in late 2020.
Venture capital firm Golden Gate Ventures said in its latest Southeast Asia tech exit report that driven by the entry of more private equity investors, secondary buyers, SPACs, and a welcoming public market for technology companies, the number of exits between 2020 and 2022 could reach 468 deals, compared to 412 in its previous projection.
“The consolidation and upcoming listings of high-profile Southeast Asian tech companies including GoTo, Grab and Bukalapak should provide significant positive returns for investors,” said Northstar’s Wong, emphasising that these developments will reinforce global PE funding into continuing digitalisation in the region.
Despite the hype, Ng from Atlantic-Pacific Capital noted that large PE firms could be more opportunistic rather than putting a lot of effort to raise a $200-300 million venture fund. “It depends on how flexible an investment vehicle is, because ultimately, that vehicle will have its own restrictions,” he said.
Partners Group, for instance, will only look at businesses with visibility on profits, Driver had told DealStreetAsia in an earlier interaction. “There’s a big group [of tech startups] where profitability doesn’t seem to be anyone’s concern right now, and monetisation will be figured out later. There we are clearly not the right partner,” he had said.
Verlinvest’s Thiolon endorsed this viewpoint: “We will not come in the pre-revenue stage. A business can become billions of dollars, but if we don’t see a path to being financially self-sustainable, that may be difficult for us to look at.”
Some don’t invest in pure online companies, one of which is Vietnam-focused PE firm Mekong Capital.
“Many consumer businesses which are online-only are missing out on a big part of the market or what customers want,” Mekong Capital’s founding partner Chris Freund said.
“So many of these tech companies are depending on a very long series of funding rounds. Bigger finance and bigger losses,” he continued.
A lot of tech companies don’t prioritise cash flow and profits because, Freund explained further, many investors, especially the venture capital firms, value startups based on top-line measures like revenues and market share, which can be retained by burning a lot on marketing expenses.
These challenges, though, do not take away from the fact that the future is tech-enabled.
Within Southeast Asia, digitalisation has been a long-term fundamental trend that started even before COVID-19, according to Northstar’s Wong. “The strong secular growth of digital companies is behind global PE funds’ interest in the Southeast Asia tech sector,” he asserted.