Private capital trumps public markets in SEA as PE/VC deals hit record

Srividya Gopal at DealStreetAsia’s Asia PE-VC Summit 2017 in Singapore. Photo: DealStreetAsia

The Southeast Asian region’s dealmaking landscape this year has been characterised by the mega, private fundraising rounds of tech unicorns.

A record 166 deals were struck in the PE and VC space in Singapore – up from 154 deals done last year and a dramatic increase from the 47 investments just five years ago.

The technology sector accounted for nearly half of the $6.5-billion worth of private equity and venture capital deals struck in the city-state, according to global consultancy Duff & Phelps.

In fact, Duff & Phelps managing director Srividya Gopal reckons there are three to four emerging unicorns that could rise to the ranks of the existing ten in Southeast Asia in the coming year.

In the public markets, initial public offerings in Singapore raised $2.3 billion – four times as much as the year before, buoyed by the mega listings of real estate investment trusts. Yet, the performance at neighbouring exchanges continues to be lacklustre. Indeed, continuing structural shifts in this region are favouring private capital.

“The most dramatic change we have seen in the regional transaction landscape in the last 5 years is the region’s ability to attract significant PE/VC investments. There have been several new funds that have successfully raised capital with a dedicated Southeast Asia focus and several global funds that have increased allocation for the region,” said Gopal in an interview with DealStreetAsia.

Edited excerpts:-

When you look at the PE/VC trends across last 5 years, what is data telling you?

The data shows that from 66 investments valued at $3.7 billion between Singapore, Malaysia and Indonesia in 2014, we have seen an increase to 278 investments valued at close to $9.5 billion in 2019. Needless to say, this growth has been led by a rise in VC investments, especially in the technology sector. 

The data also shows that with an increased PE/VC activity into the technology sector, the differentiators between transactions are becoming more and more unclear. We are seeing corporates set up venture investment vehicles to take minority stakes, while PE firms do control transactions through buyouts.

Similarly, some of the late-stage investors have been seen to diversify their investments into pre-profit stage companies and the typical equity investors expanding to debt or convertible debt investments. The exit options are also changing with longer holding periods, preferred exits through trade or secondary sale rather than IPOs, considering the valuations and other dynamics of public markets.

How do PE/VC investments in tech in this region compare with other regions such as China, India and the US? When it comes to tech deals, do you see Indonesia becoming the largest player in this region in terms of both deal value and volume? 

For PE/VC investments into Singapore, Malaysia and Indonesia, in addition to the size of the pie growing to about 2.5 times in the last 5 years, we have seen the share of the technology sector in the pie growing from single-digit percentage to nearly half of the total value. While Southeast Asia lags a few years behind the US, China and India with regard to investment into technology sectors, we have seen substantial growth over the last 5 years and continue to expect to see more investments. China has overtaken the US this year with the number of global unicorns with a 42% share. We could possibly continue to see interest both from Chinese and global investors in the Southeast Asian tech sector. 

Today, Indonesia has more unicorns than any other Southeast Asian country. In addition, it is possibly the largest market within Southeast Asia for several global and Chinese tech businesses. While the largest portion of investment in the tech sector going forward will be routed into Indonesia, the investments could structurally come through a Singapore entity, from a strategic perspective. 

Do you see SEA unicorns continuing to raise capital at record valuations? Even as their losses widen, will private investors continue to reward them with even higher valuations? 

We can possibly look at this from two angles. 

Globally, we have seen a dramatic comeback of the internet/tech-enabled sector after the dot-com boom and bust. This time, the sector is back for good – considering the substantial increase in internet penetration, smartphone usage and online payments. It is no longer about forecasted revenues through advertisements, but trillions of real dollar transactions done online. Having said that, in the recent past, there has been huge volatility in the market that has impacted valuations – with several start-up failures, mark-downs, down-rounds, post-listing value erosions and more. We can expect to see more correction in valuations and an increased focus on profits, rather than just volume growth. 

From a SEA perspective, with a lower base and late-mover advantage, we have been witnessing increasing valuations in the tech sector. As the PE/VC investments and the tech sector matures, we can expect to see a change in value drivers here too, with an increased investor focus on profits. The positive factors for us are the continuing increase in technology adoption, economic growth, favourable demographics and the availability of resources. These could help cushion the valuation correction if played right.

IPOs in the region raised just over $3 billion in 2019. Is this an indicator of the revival of SEA IPOs? In the deal-making space, do you see many more listed companies being taken private in SG?

While we can say that there is a rebound in the IPOs in Singapore, with a capital raised at $2.3 billion, it may not be appropriate to call it a revival in the region, considering the capital raised in Malaysia and Indonesia are still much lower. While we do not track IPOs in Thailand or the Philippines, my understanding is that Thailand has been seeing capital raised at about $2 billion-plus, stable over the last few years and the IPO value in the Philippines has been insignificant over the last several years. 

Investors in SEA IPO markets typically expect steady profits and a stable return, which is possible with REITs as well as many of the mature industries. Hence, the top sectors we see raising IPO capital in the region are real estate, BFSI, industrial, etc. There is a dichotomy in the region where the high growth is coming from segments like e-commerce, fintech, payment, life sciences, research technology, etc, but these are not the standard target segments for an IPO. The Hong Kong Exchange is much deeper and has significant backing from Chinese companies, [but] even for HKeX, the share of old economy sectors in the market cap is significantly higher than the new economy. 

Privatisation and de-listings are an important trend we observed over the recent years, where a PE fund or a strategic player and/or an existing controlling shareholder take a public company private, with a view that significant value creation is possible post-privatisation. We expect this to continue.

Despite efforts made by the Singapore bourse to increase liquidity through dual-class share listings, and a slew of other measures, Hong Kong remains the favoured Asian hub for listings. There have also been mega listings in the city, despite the protracted protests. What more can Singapore Exchange do to attract more listings?

In the past, the SGX has been seen more like a regular dividend income, relatively safe investor haven and has been able to avoid significant peak and trough cycles of a capital gains market. Investor perception and expectation, therefore, have been formed accordingly.

In recent times, however, the SGX has already been pushing to bring in several policy changes, reforms and new initiatives to attract more IPOs, especially from the high growth potential new economy sectors. Having said that, we have to accept that we cannot structurally change our economy or the expectation of typical Asian investors, overnight. While it is true that HK has managed to attract several new economy listings after its initiatives in the last few years, we must also consider that many of these listings are currently trading below their IPO price. The new economy mega listings on HKeX has gone down this year compared to last year, but for one ultra-mega listing by Alibaba. In general, exchanges across the world are facing pressure due to valuation corrections, market volatility, trade wars and many other factors.

Overall deal value for SG is at a 5-year low – is that a cause for concern?

It is true that 2019 has seen the lowest overall deal value for Singapore since 2015, with a 23% fall from the highest level that was witnessed last year. However, with the number of multi-billion dollar deals being the same and the dip in the number of deals being less than 6% from the peak, the indication seems to be that some of the mega deals are not as large as it used to be. This could be more of a timing issue as mega deals take several months to fructify. Based on the healthy levels of value and volume this year as well as the year-end pipeline, this is perhaps not a cause for concern. 

What does 2020 look like for the region? Are deal values and volumes expected to pick up or tail off further? When you look at the deal landscape in SEA, what are the concerns going into 2020?

At this juncture, we are clearly standing at a cross-road, when we talk about the transaction outlook for SEA. We are looking at market volatility, political uncertainties, trade wars, slowing growth in several global economies and other negative aspects. However, we also have a lot going for us in the region such as favorable demographics, increased technology adoption, younger population, rapid urbanization and many more positive factors. Southeast Asia is expected to enter a Golder Age of rising affluence with a significant focus on internet and technology, according to the Asia Partners 2019 Internet Report. 

From a transaction perspective, for 2020 and going forward, we can continue to expect healthy levels of activity. M&A and Investments have become a key strategy for growth for businesses, especially as we see slowing organic growth rates across the world. Having said that, we can expect to see the activity come with disruptions and significant changes, over the next few years.

 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.