Like most other sectors in the world, the venture capital and private equity industries are facing a challenge like never before. The current uncertain market conditions mean that investors, by and large, are more bearish and – in Southeast Asia’s case – has dampened the bullish activity we have seen in the region’s VC and PC industries over the past decade.
In this special edition of From the Hill, we take a close look at why COVID-19 will not stymie Southeast Asia’s VC and PE activity for long and why governments will continue to play a pivotal role in the success of both sectors.
Feature Topic
How government policies can support venture capital and private equity activity in Southeast Asia
Despite the current global economic headwinds, Southeast Asia continues to be one of the world’s most attractive hubs for venture capital and private equity activity.
In the venture capital space, Southeast Asia has received record funding over the past two years while deal sizes have doubled over the past three. The region is now home to 14 unicorns, with four entering the fold just last year. The number of exits has also increased, and entrepreneurs have come out of the first generation of high-value companies and are building the next generation of startups, signalling a slowly maturing ecosystem.
The region’s private equity industry’s growth mirrors the performance trends of the VC sector. In 2019, the deal value in Southeast Asia rose by 19% to US$12 billion and the same year saw the region see its highest deal count ever, even when PE activity in Asia slowed as a whole.
The very visible hand of governments
Southeast Asia has been a key destination for multinational companies – sustained economic growth, a rising middle-class, a relatively young population and increasing proliferation of technology means that business potential is immense, especially for investors looking at the long-term.
Alongside demographic factors, there has been strong government involvement behind the growth of Southeast Asia’s VC and PE ecosystems, namely in the way of policies that ease local business incorporation and relax investment regulations to draw in more capital. Singapore and Indonesia have set the bar for building a conducive ecosystem for both start-ups and investors. Thailand, Malaysia and Vietnam are quickly catching up, especially as their governments have been ramping up their respective digital transformation agendas.
For example, in Vietnam, there has been a significant increase in smaller venture deals and locally-based tech companies are beginning to match their Singapore-based counterparts in terms of funding.
In addition to building enabling ecosystems for VC and PE activity, governments have been getting in on the action themselves, even if indirectly. For instance, state investment firms – such as Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional – have been heavily involved in cross-border PE deals. Meanwhile, government-backed funds such as Singapore’s Vertex Holdings (of which Temasek is an investor in, and in several other VCs) and Indonesia’s MDI Ventures are prominent VC players, especially for early-stage ventures.
Policy considerations in times of crisis
Like many other economic sectors worldwide, Southeast Asia’s VC and PE industries have been hit by the ongoing COVID-19 pandemic – as deal value, deal volume and fundraising activity plunged in Q1 2020 compared to the same period last year.
However, it is important to note that the reduced activity does not signal a sustained period of VC and PE activity contraction; unlike public markets which are more sensitive to crises in the short-term, VC and PE players typically take a long-term view. This is especially since valuations have tumbled and investors are looking for the right time to conduct strategic exits. In fact, some of the most prominent unicorns today were borne out of past economic crises.
Additionally, the ongoing pandemic is showing that while nations are worried about the immediate impact of COVID-19 on its citizens, they are also concerned about the flight of capital. The way that the region’s governments are responding to the situation is to take a more active role; more support is being given to start-up ventures – either directly to start-up ventures that can potentially support relief efforts – or by creating conducive market conditions, such as incentivising businesses and workplaces to digitalise, which encourages the growth of start-ups providing digital solutions.
Still, many investors are now reconsidering their risk appetite for Southeast Asia. A prominent VC based in Singapore noted that investors are more cautious and resistant to committing capital. A Limited Partner (LP) observed that they’re willing to commit capital or partner with funds that they already have existing relationships with, and were unlikely to invest in new funds.
In general, there is intent for LPs to explore Southeast Asia, and recent happenings will drive interest to give the region a more serious look. Several regional and global funds have doubled down on the region, even in the midst of the pandemic. Sequoia Capital is ramping up its investments in Southeast Asia from the US$1.35 billion it raised from two funds, Lightspeed Ventures recently established its regional headquarters in Singapore to tap into the region’s immense tech potential and East Ventures set up a US$88 million ‘post-pandemic’ fund. Whether new LPs will commit capital to the region in the near future – let’s wait and see.
Here are the top regulatory and policy considerations:
Regional and local fragmentation
Scaling ventures across the region is a perennial challenge due to its heterogeneous demography, which also translates into different investment regulations. There are also different regulations domestically. For instance, ventures in e-commerce and logistics are more easily scalable as their industries are typically less regulated as compared to areas such as FinTech and healthcare.
Financial services liberalisation
While FinTech investment in Southeast Asia has boomed in recent years, Singapore’s move to begin issuing digital banking licenses – including two digital full banking licenses – will likely foster the broader digitalisation of the region’s financial ecosystem. While this may ramp up interest in FinTech investments, with more digital banking players looking to securitise their services, there will be more demand for digital security providers.
Political uncertainty
The prime focus of Southeast Asia’s governments has been to contain the pandemic, but there have been varying levels of success. The political strength of the incumbents in Indonesia and the Philippines is being called into question over their handling of the pandemic, while Malaysia experienced a sudden change in government a month before the country was put into lockdown. Even under normal circumstances, political instability tends to ward off investors and coupled with the ongoing pandemic, more investors will think twice about Southeast Asia as an investment destination.
A new normal for start-ups?
The pandemic has shown the growing importance of technology and the need for holistic digitalisation. People, businesses, investors and governments must explore new innovations and solutions – especially in retail, healthcare and education
Investors are understandably cautious, and start-ups cannot use venture funding as a crutch. Gone are the days of the ‘growth at all costs’ approach. They must now build sustainable companies to put them on the path of profitability.
While, in the short term, we may no longer see the sort of activity we have been accustomed to over the past decade, COVID-19 may actually provide the crucial market correction that recalibrates valuations and encourages the growth of better, sustainable companies. These trends and companies will entice VC and PE players to keep investing in Southeast Asia.
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