Debt financing takes flight in Asia as COVID-19 pounds startup valuations

Two recently-concluded transactions suggest that debt deals may be seeing a pickup among Southeast Asian startups.

In the first week of October, Indonesian peer-to-peer (P2P) lender Investree raised around $30 million in debt from undisclosed investors, the company confirmed to DealStreetAsia. Adrian Gunadi, the company’s CEO and co-founder, said the firm also expected to raise $35 million in equity funding.

In another instance, in September, Singapore-based credit collection company Flow Technologies announced it had raised a round of venture debt capital from Genesis Alternative Ventures. The deal marked the sixth in Genesis’ venture debt portfolio since its mid-2019 launch.

Flow and Genesis declined to reveal the size of the loan, but Genesis’ deals are typically in the $1-5 million range. Flow indicated that the interest rate on the debt was in low double-digits, and had a tenure of less than five years. The company said it plans to use the proceeds to acquire a portfolio of non-performing loans from lenders in the region, with an asset life of around three to four years.

Arun Pai, chief sales and strategy officer at Flow, said the company chose venture debt over equity financing as it would allow for higher returns. “You don’t want to dilute equity when you know what you’re purchasing is a productive asset that will be able to generate returns in multiples of the cost of capital,” Pai told DealStreeetAsia.

His take on debt, however, is contrarian as private credit, including venture debt, has traditionally not been a favoured financing option in Asia.

In the region, banks account for more than 75 per cent of lending, compared with around 50 per cent in Europe and 20 per cent in the US, according to the Private Credit in Asia report, published in August by industry body Alternative Credit Council, which represents asset management firms, law firm Simmons & Simmons, and global business consultancy EY.

However, banks tend to secure their loans with collateral such as real estate assets, or capex lending which can be disadvantageous for businesses in growth stages, the report said.

This is one of the reasons why private credit is increasingly becoming a viable alternative for startups.

Taking wings

The Private Credit in Asia report cited research from Preqin that showed Asia-Pacific private credit in assets under management more than doubled to $57 billion as of June 2019, from $27 billion in December 2014.

Growth in Asia Pacific and Global private credit assets under management (AUM)
Credit: Private Credit in Asia report, published in August by industry body Alternative Credit Council, which represents asset management firms, law firm Simmons + Simmons and global business consultancy EY.

 

Despite the robust growth, Asia Pacific still accounted for a mere 7 per cent of global allocations to private credit, by assets under management, in 2019, the data showed.

It also pales in comparison with the growth of equity funding in the region. Asia Pacific-focused private equity and venture capital assets under management hit $1.3 trillion at the end of 2019, compared with around $400 billion in 2014, according to a private equity and venture capital report published by alternative-asset data-provider Preqin in September.

A recent slowdown in equity financing, though, could lead to increased demand for venture debt, Patrick Yeo, the leader of consultancy PwC’s venture hub in Singapore told DealStreetAsia.

“In this kind of environment, I’m expecting [venture debt] to pick up with better publicity, and better market penetration,” Yeo said. “With better exposure, [startups] will realise it’s not a bad idea to extend their runway to finance their working capital before their next big fundraising.”

Within Asia, most venture debt deals have tenures of around two to four years, with ticket sizes from as little as $500,000 to around $4 million, Yeo said.

Interest rates run from as low as 5 per cent to as high as 12-13 per cent, Yeo said, adding many venture debt deals include an equity “kicker,” or a warrant to be converted into equity at a discounted strike price. The warrant can affect the interest rates startups are charged.

The interest rates in Asia tend to be lower than in the US, where rates run around 10-12 per cent, as the region’s debt market is in an infancy stage and startups need incentives to sign on, Yeo said.

Genesis managing partner Jeremy Loh, too, told DealStreetAsia his company was seeing more entrepreneurs looking to raise debt as part of their financing rounds. But Loh added the option wasn’t for “too young” companies, and was more appropriate for startups past the seed and series A stages, with a “proof of concept”.

He added that Genesis was also generally more interested in business-to-business models as they tend to recover faster from economic shocks. Genesis is currently working on three to four more opportunities, including in the logistics sector and an AI-chatbot business, Loh said.

Lower valuations make equity unattractive

In April, Vinod Murali, managing partner at Alteria Capital, which provides long-term debt capital to venture capital-backed startups, pointed to falling valuations as a driver of startups’ interest in taking on debt capital. Startup valuations in the region have tumbled as the COVID-19 pandemic damages economies.

“When valuation is under pressure and you’re trying to raise $25 million in capital, if $5 million can be substituted through non-dilutive debt, it packs a punch for the founders, especially if valuations have dropped by 15-25 per cent,” Murali said in a DealStreetAsia webinar titled “Is venture debt a lifeline in a pandemic-afflicted world.”

Another player in the venture debt space is the Singapore-based bank DBS, offering lending to post series-A companies “strongly backed” by a venture capitalist partnering with DBS, according to the bank’s website.

“In line with our belief in nurturing the next generation of technology entrepreneurs, DBS offers venture debt financing to support promising growth-stage technology startups looking to expand their capital raising options,” Joyce Tee, DBS’ head of SME banking, told DealStreetAsia via email.

“Venture debt financing provides startups with an alternative source of capital to extend their cash runway before moving on to the next round of venture capital financing, affording these firms with greater operational flexibility while minimising shareholder dilution,” she said.

Large investors are also looking to expand their offerings in alterative credit in the region.

Earlier this year, Keppel Capital, the asset management arm of Singapore-listed Keppel Corp., completed the acquisition of a 50 per cent stake in Pierfront Capital Fund Management, an independent investment company offering junior debt, mezzanine, and structured financing services.

In April, Christina Tan, CEO of Keppel Capital, told DealStreetAsia the acquisition was aimed at expanding her company’s private fund products to include debt.

“Private debt is a growing asset class, particularly in today’s environment in Asia-Pacific, where we have observed considerable demand for alternative lending solutions to meet capital needs of corporates and projects in real asset sectors, arising from the structural tightening of traditional bank lending in select markets,” she had said at the time.

Editor’s note: An earlier version of this article incorrectly indicated when Keppel Capital completed the acquisition of Pierfront Capital; the deal was completed earlier this year. 

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.