SE Asia may produce at least 10 more unicorns by 2024: Bain & Co

Photo: Bloomberg

With global investors pouring capital into Southeast Asia, the investment ecosystem in the region has developed critical mass and is entering a new growth phase that would see it produce at least 10 new unicorns by 2024, according to Bain & Co.

“We expect deal value over the next five years will total $70 billion – double the level of the previous five years. Southeast Asia-dedicated funds’ dry powder – committed but unspent capital – has more than doubled since 2012. Since 2012, 10 unicorns including Grab, Go-Jek and Traveloka have created a combined market value of $34 billion, ranking Southeast Asia in the third place in the Asia Pacific region, behind only China and India,” said the report.

On the private equity side, the report said, PE investments in Southeast Asia hovered for years between roughly $6 billion and $9 billion, leaving many PE funds with regional offices in the region “wondering in 2016 when investment would take off”.

However, the sector is now ripe for the next phase of growth, thanks to a steady influx of new investors, maturing startups that are seeking to raise more capital, as well as strong exit momentum and healthy returns. Active investors completing PE transactions with deal values of $10 million or more rose to 124 in 2017 – a 45 per cent increase from the previous five-year average.

According to Bain, the pool of institutional investors, in particular, has expanded significantly. New investors such as local VC and PE funds, sovereign wealth funds and global funds are attracted by the region’s strong macroeconomic fundamentals, the change to invest in emerging regional champions and a deepening secondary market for deals of all sizes.

It noted that more than 1,300 companies in Southeast Asia received a first round of seed, or Series A financing since 2011, including 261 funding rounds in 2017, which is five times the level of 2011. On exits, Bain said the exit deal value in 2017 rose to $16 billion, up 86 per cent from the previous five-year average.

“That virtuous investment cycle helps PE fund managers feel more confident about raising new funds and putting capital to work. And as PE funds expand their portfolios, they broaden the potential market for secondary transactions,” said the report.

Singapore is still the ASEAN hub

Although the startup ecosystems in the region are getting more vibrant, Singapore remains Southeast Asia’s investment hub, said Bain.

The number of companies in Indonesia raising a first round of funding in 2017 rose over 300 per cent from 2012. Together, Indonesia and Vietnam generated 20 per cent of the region’s PE deal value over the last five years and that percentage is likely to grow.

The firm’s survey showed 90 per cent of its investor sample voted Indonesia and Vietnam as the hottest Southeast Asian market outside Singapore in 2018 and 2019. Bain expects the tech sector to contribute 20-40 per cent of deal value over the next five years while the fintech sector especially is expanding rapidly.

“Based on the valuations of leading fintech companies and strong investor interest in the sector, we expect two or three fintech unicorns to emerge by 2024. Information and communication technology firms are also growing rapidly and attracting larger pools of venture and PE investment. In addition, we see a redoubling of investor interest in healthcare and education – sectors with significant long-term growth potential, but traditionally fragmented,” the report noted.

Quick Interview with Suvir Varma, Bain’s senior advisor for Global Private Equity practice and Alex Boulton, principal of Bain Singapore


How do you view the PE and VC space in Southeast Asia – how do these two asset classes support the ecosystem and each other?

The PE and VC ecosystems are inherently connected across the investment spectrum, as late stage VC may sell a portfolio stake to growth investors with eyes on a PE buyout secondary exit in the future. Funds themselves may also move up the investment spectrum in terms of focus as strong returns allow them to raise ever larger funds that, in turn, push them into writing larger cheques.

In the past, these two ecosystems have operated fairly independently as large PE buyout funds have focused their attention on companies that are already large and profitable.

However, in recent years we’ve seen a stronger convergence of PE and VC as startups have progressed further, faster. Trax, a Singapore provider of computer vision and analytics solutions for retail founded in 2010, just recently achieved a valuation over $1 billion after securing investment from Boyu Capital, one of the largest private equity investment firms in Greater China. This is on top of a 2017 investment from Warburg Pincus, a US PE firm with over $47 billion in AUM that also counts renowned Southeast Asian unicorn Go-Jek in its portfolio.

What are some of the pain points of investing in the region?

Historically, one of the main pain points for investing in the region has been the availability of assets that are open to sale at realistic valuations. Competition from local conglomerates in markets like Thailand, Indonesia and Philippines have also served as a barrier to investment.

Today the main challenge is the rising competitive intensity in the investment landscape from all angles. Traditional funds are facing increased competition from sovereign wealth funds and other institutional investors, corporate venture capital divisions, conglomerates from China and Japan, and more.

When you said the VC deals in SEA have quadrupled in 2012-2017: who are these VCs – are they based in SEA or are they external investors from China, Korea, Japan, the West etc.?

There is a diverse group of VC players in the Southeast Asia backyard that are rapidly expanding their portfolios. Some of the most active investors include regional VCs (e.g. Openspace, Vertex, Wavemaker Partners, East Ventures), US-based VCs (e.g. Sequoia, 500 Startups), Chinese tech companies (e.g. JD.com, Alibaba) and corporate VCs (e.g. Axiata Digital).

Do you see more Southeast Asia-based VC to emerge in the next 2-3 years?

There is no doubt that the competitive landscape is intensifying for VCs and we can expect more Southeast Asia-based VCs to emerge in the next 2-3 years. The entry barrier is relatively low in terms of both capital required to participate in VC investments and regulatory hurdles – in October 2017, the Monetary Authority of Singapore further simplified the authorisation process for venture capital managers.

The important question is – how many of those new managers will survive, and make an attractive return on their investments? As abundant capital drives up prices, VCs will need to be very clear on their investment ‘sweet spot’ (the focus sector, investment stage and/or value creation model) and sources of differentiation (e.g. sourcing, diligence, deal structuring, portfolio support).

Also read:

Trade sales, secondaries to replace IPOs as exit route in Malaysia: Bain & Co

SEA & India beneficiaries of greater diversification by PE firms in Asia: Suvir Varma, Bain and Co.

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.