Asia tech is not a winner-takes-all market: KKR’s Louis Casey

Photo by Joshua Golde on Unsplash

KKR, one of the most active private equity investors in technology businesses, sees a long runway for growth in the sector in Southeast Asia. Its tech portfolio in the region includes ride-hailing and e-commerce behemoth GoTo, real estate listings platform PropertyGuru and digital and financial services firm Voyager Innovations.

As it extends its mandate to back earlier stage, high-growth technology companies, it zeroed in on Vietnam-based business management software provider KiotViet last month. Its investment in the firm was its first in Southeast Asia from its Asia Next Generation Technology (NGT) strategy.

According to a Sept 2021 investor presentation, KKR is considering a new Asia-focused NGT strategy focused on earlier-stage investments. The firm has previously raised two NGT funds focused on North America, Europe and Israel. KKR declined to comment on the fundraising.

“Southeast Asia is an important part of our Asia strategy. It is incredibly dynamic,” Louis Casey, a Singapore-based member of KKR’s NGT team, told DealStreetAsia in an interview.

KKR expects its tech investments to accelerate in the region as new consumption trends and business models emerge on the back of rapid digitalisation, which the COVID-19 pandemic has accelerated.

“[T]he long-term fundamentals that underpin the technology stories in China, India or Southeast Asia are broadly consistent and are driven by highly favourable demographic trends and a very strong willingness to adopt technology,” Casey said.

On high valuations in Asia, he asserted that it reflects the market’s awareness of the size of digital opportunities. That said, incorrectly assessing the upside opportunity “is usually the biggest error an investor can make in this segment,” he said.

KKR, he added, sees opportunities in backing very large winners as well as companies in markets where many winners co-exist.

Excerpts of the interview:

KiotViet is the latest growth technology investment KKR has made in Asia and the first in Southeast Asia. What is your strategy here and how does KiotViet fit in it?

Our Asia growth technology strategy seeks to pursue attractive investment opportunities in market-leading, high-growth technology companies in the Asia Pacific. We are sector agnostic, so we can invest across many different areas, be it software, internet, fintech or digital media but we tend to try and prioritise our sourcing based on thematic areas of interest that we believe are particularly compelling.

KiotViet was an opportunity that sat squarely in one of those thematic focus areas – the intersection of financial services and software enabling small businesses in Southeast Asia. KiotViet helps MSMEs to digitalise their businesses, enhance their operational efficiency, and ultimately grow. There are several new service opportunities at their fingertips and the business is only just getting started.

Given that tech deals in Asia, especially in emerging markets such as Southeast Asia, are generally small compared to KKR’s traditional cheque sizes, how flexible are you in this region? What are the opportunities you’re seeing here?

Historically, we have been somewhat weighted to larger cheque sizes because we didn’t have a dedicated growth technology strategy in this part of the world, but our new strategy looks to change that. We can now invest down to about $30 million and all the way up to $500 million or more – that’s one of our key differentiators. That flexibility means we really focus on the business, the team, and the risk-reward opportunity first – and then decide what pool of capital is most appropriate to support the business. We can do minority or majority stakes, lead, or follow. Really everything is on the table, but we expect most of our deals in growth will be leading minority investment rounds.

In terms of opportunities, Southeast Asia’s sizable millennial population are fast adopters of mobile internet technology. This is shaping new consumption trends and driving a level of interconnectivity that will see new business models emerge. Some of these consumer models are still reliant on some infrastructure improvements (particularly in logistics, which we are watching closely) but the Asia consumption story is as strong as ever. We also think B2B tends to follow B2C from an opportunity evolution standpoint and we are really excited about this space.

We clearly really like the digitisation of the MSME story, which is driving the demand for software, financial services and B2B e-commerce. We also like derivates or enablers to the e-commerce consumption story like logistics or social commerce tools. Broader financial inclusion, be it in consumer or business, is also a theme we are actively working on and that’s just to name a few.

Southeast Asia might not deliver as many scalable businesses as China and India. Do you see yourself continuing to scout for opportunities in each Southeast Asian market? Will there be more tech platforms that can grow across the region and co-exist?

Southeast Asia is an important part of our Asia strategy. It is incredibly dynamic. The fundamentals and positive demographic trends all point to a long runway for growth in tech in the region.

Since we started investing in Southeast Asia in 2005, we have invested behind more than 20 companies through our private equity strategy and deployed more than $4 billion in market-leading companies across core markets in Southeast Asia, including Singapore, Indonesia, the Philippines, Vietnam and Malaysia. Examples of tech portfolio companies that have grown across the region include GoTo and PropertyGuru. We expect our investment activity in tech will only accelerate from here.

Southeast Asia is still at a very early stage compared to China and India but we, like many other investors, think it presents tremendous opportunity, and the region is a key part of KKR’s strategy.

In regard to platforms spanning regions, while each market is unique, we think the long-term fundamentals that underpin the technology stories in China, India or Southeast Asia are broadly consistent and are driven by highly favourable demographic trends and a very strong willingness to adopt technology. We have already seen several Chinese or Indian companies or founding teams that are leveraging learnings from their home markets and building their businesses in Southeast Asia. I think we will see a lot more of that. Those businesses and teams have learnt critical lessons from looking at analogous business models in more developed, competitive markets and are applying those lessons in Southeast Asia.

If we put tech firms next to more mature businesses, new-age companies have less financial data, and thus less visibility, as well as a track record of the management to provide for investors. What level of risks do you take when doing tech deals?

We are in the risk-taking industry, but I think it’s important to clearly understand and segment risk into different categories. We are growth investors, so we look to participate once the product-market fit is proven and the business wants to scale up. This means that there is evidence of demand for a product or service in a particular market and importantly, customers are willing to pay for that product in exchange for the utility that they derive from it.

The key risks we tend to take and look to understand are bets on ‘scaling risk’ and that usually involves taking a view on how big the market opportunity is, how efficient the go-to-market motion of the business is, how scalable the team is across that journey, and how good the future-state product could be and what kind of platform opportunities could emerge to build new revenue streams. We are also very focused on unit economics and spend a lot of time with teams to understand what their unit economics are today and how they may evolve in the future.

COVID-19 has certainly created greater interest in the digital space. Is it driving prices up? What metrics do you use to validate valuations claimed by the companies?

The short answer is yes, valuations are going up and I think that is a reflection of the market’s awareness of the size of the opportunity improving. COVID-19 has helped drive an accelerated wave of digital adoption from a point of pure necessity.

We run a very concentrated investment style, so we look to be disciplined and remind ourselves of the peaks and troughs of market cycles. That being said, we believe absolute asset selection is just as important, if not more important in growth investing than being too academic about valuation. For special businesses and teams, any traditional valuation metric will make an investment looks expensive. We use a range of fundamental valuation measures in our underwriting process, but we really focus on how big we think a business could be. Incorrectly assessing the upside opportunity in a business is usually the biggest error an investor can make in this segment, so we spend a lot of time on that.

What also helps is our ability to tap into both our local team’s expertise and experience as well as KKR’s integrated global technology ecosystem. We have invested behind more than 100 technology companies and are able to count on around 15 technology senior advisors globally to assess opportunities.

Increasing interest means increasing competition too. While having KKR on the cap table is a huge milestone for businesses in Asian markets, they have options from strategics and other investors that had earlier exposure to tech in the region. What’s your sense about deal competition? 

We have looked to differentiate ourselves by combining a strong local team and an understanding of the local markets and cultures where we do business with our global expertise and investment experience.

KKR has had boots on the ground in Asia for almost two decades now since 2005. Over time, we have built a team in the region and cultivated trusted, long-term relationships here. We are looking to support companies that can benefit from what we have to offer, such as our global networks and operational expertise, and use our multi-faceted platform to take them to the next level. We think this confidence is also reflected in our successful track record of helping Asian businesses – including in Southeast Asia – to expand domestically and internationally.

Is Asia a “winner-takes-all” market? What can investors do to make sure the one they back will be the winner?

No, I don’t think so. Some market segments, sectors and business models tend to exhibit returns to scale or ‘winner take most’ characteristics but some do not. It requires some nuance. We see opportunities in both areas – to back very large winners where we think there will be some level of consolidation, but also back companies in markets where we are confident there will be many winners.

We also tend to ask ourselves where we can best apply our knowledge and experience to promising companies and to help them achieve their growth ambitions. Amid this environment, it is important for investors, including ourselves, to have a clear understanding of how and where we can best add value to the region’s companies to maximise value creation for all stakeholders.

As you join in at a later stage, exits for you would be when companies do IPOs. But while SPACs in the US seem to be waning already, and local stock markets might not offer a lot of liquidity, how do you picture exits for KKR’s tech investments in Asia?

While every investment is unique and there’s no one-size-fits-all approach to exits, we will have strategies in place to support our portfolio companies and plans around future exits. Despite some of the recent SPAC volatility, there is clearly evidence of the exit market in Asia maturing and becoming an interesting destination for local companies to seek liquidity. The US market will also continue to be a viable pathway and US investors are very excited about the growth story in Southeast Asia.

Overall, how have tech deals helped KKR improve returns?

We can’t comment specifically on returns, but we are very happy with how our global technology franchise is scaling, and how we can use our learnings in technology to help businesses in the KKR portfolio that operate in more traditional industries.

Generally speaking, almost every company is a “technology company” or is touched by technology nowadays. We are believers that tech can be used to improve your customer value proposition and improve efficiency. What’s good for the customer is good for the business, which is good for our LPs.

(Editor’s note: This story has been updated to note that KKR declined to comment on its fundraising.)

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.