Vertex’s Chua Kee Lock on bonds, deal-making and the Temasek relationship

Vertex Holdings CEO Chua Kee Lock

Vertex Holdings isn’t your typical venture capital investor. Few VC firms can boast of having Singapore state investor Temasek as a committed limited partner (LP) on its board. Even fewer are in a position to influence Southeast Asian venture capital the way it has.

“DBS Bank is now saying they are receiving multiple requests from VC funds to issue corporate bonds as well,” shared Vertex Holdings chief executive Chua Kee Lock in a video call with DealStreetAsia. 

VC trend-setter? Perhaps. Vertex’s $330 million bond issuance last month was the first time a global VC holding company issued a Singapore dollar-denominated public corporate bond. It was highly subscribed by investors – some four times oversubscribed with an order book of over S$1.1 billion, according to the firm. To Vertex outsiders, it was also a highly unexpected move. 

Does a Temasek-backed VC firm really need to issue bonds to raise money? Why place the extra pressure on yourself to distribute yearly dividends if you’re a venture capitalist, to begin with? Diversification is the reason, says Vertex.

Apart from capital from Temasek and some new LPs as well as recycled cash from past investments, the Vertex bond now acts as an additional channel to support the firm’s sprawling operations at the holding level. 

Source: Vertex disclosures

“We’re basically borrowing at a 3.3% interest rate for Vertex Holdings, which is then used to finance the underlying funds. Let’s say these funds generate 20% net IRR to you (Vertex Holdings), you make a difference of 10 times or more on a cost basis. So from a Vertex Holdings point of view, the cost efficiencies are very good,” explained Chua. 

Bond issuance isn’t commonplace in venture capital, he acknowledged, but it’s been done frequently by private equity giants such as Blackstone, KKR and BlackRock, all of whom have raised billions in bond dollars to finance their myriad equity, debt and buyout funds. 

It doesn’t make Vertex any less of a venture capitalist though, asserts Chua. Not even if its behaviour is beginning to mimic some of its distant PE counterparts. Apart from bonds, Vertex has been said to be eyeing special purpose acquisition companies (SPACs) on the Singapore Exchange (SGX) these days. Vertex declined to comment on its SPAC plans. 

A great convergence is already taking place as we speak. Global PE funds are dabbling in early-stage technology investments, while venture capitalists are launching growth-stage funds to double down on or invest pro-rata in their portfolio superstars. Vertex itself has two Southeast Asian growth funds in the bag, the latest being a $330 million vehicle. Plenty of others in the region have growth funds too, including Openspace Ventures, B Capital and East Ventures. 

It really doesn’t hurt to have extra firepower at a time when competition for tech deals is piping hot. “I thought what Vertex did was incredibly clever,” said the managing partner of a Southeast Asian VC fund, who declined to be named. “Coupon rates are low, so this is cheap money to raise. Why should VC investors restrict themselves to private placement agents and equity to raise capital?” 

Vertex is well-positioned to replicate the PE playbook, thanks to its Temasek connection, note industry observers. In 2018, Temasek-backed Azalea Group issued Astrea IV, a $500 million PE bond at a coupon rate of 4.35% – the first time a structure like this was made available to retail investors. Azalea has since gone on to launch two more, the latest of which was the $185.8 million (S$250 million) Astrea VI unveiled in March this year.

Another perk of raising bonds is the ability for Vertex to boost its internal rate of return (IRR), something LPs typically inspect before re-committing to subsequent funds. One industry source speculated that Vertex’s real motivation for issuing bonds was to boost its IRR to raise its standing in the eyes of Temasek. 

According to Vertex Holdings’s disclosures, 50% of its annual profits must be returned to Temasek, a potentially hefty price to pay for a general partner (GP) which has managed to spot some of Southeast Asia’s most valuable startups like ride-hailing decacorn Grab. 

Source: Vertex disclosures on select portfolio exits

Chua vehemently disagreed. “Whether 50% is too high or too low is debatable lah,” he said. “For every two dollars you make, you give me back one dollar. That one dollar can be put back to re-invest. I think that’s quite sensible, right?” 

The dealmaking landscape has transformed massively though. Vertex is not just competing with global and regional funds for deals these days. It is now going head-to-head with Temasek-backed PE cousins, of which there are several. 

The latest is Seviora Holdings, a $55 billion asset manager representing the combined forces of Azalea Investment Management, Fullerton Fund Management, InnoVen Capital and Seatown Holdings. Singapore-based Seatown, also an investor in Indonesian tech giant GoTo, recently set up a $1 billion private capital fund. 

In addition, Pavilion Capital, Heliconia Capital, and Temasek Holdings are themselves writing small cheques. One source close to Temasek told DealStreetAsia that the Singapore state investor has looked at deals as small as $1 million in a dramatic shift towards early-stage deals. Even venture building isn’t considered too unorthodox for Temasek these days, wrote Nikkei Asia in July.

One of Vertex’s newly crowned unicorns, Nium, already boasts an array of Singapore Inc across its cap table. Investors in the cross border payments firm include GIC (via Archipelago Investment), Temasek Holdings (via Ossa Investments), Vertex Growth and Vertex SEA and India, in addition to Riverwood Capital Partners, Visa and others.   

Source: Vertex disclosures on select portfolio companies

Vertex’s Chua deftly dodges the awkwardness of this set-up but acknowledges the encroachment of Temasek’s PE players on venture turf. 

“Yes, there’s always potential competition. Everybody is trying to do what’s best for themselves, and they’ll try to outperform others. But competition is always good, right?” said Chua. “I always tell my colleagues that if there’s any industry worth investing in, there will always be competition. It’s no different here.” 

“A wise man once told me – not even a parent can claim that they treat all their children equally,” Chua mused. 

“There will (always) be some favouritism and even accusation of favouritism. That’s just human nature. This is not something we spend time worrying about. The most important thing is to deliver good results, do well, and continue to stay in the forefront of things,” he added.

It certainly has so far. Chua adds that Vertex is not under any pressure to deliver the next Grab. Not yet, anyway. “We expect another six to seven more exits across all our global funds in the US, China, Israel and Southeast Asia in the next 18 months or so. We’re on solid footing.”

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.