The investment ecosystem in Southeast Asia is poised for growth, driven by strong investor interest in the region’s tech sector, especially the fintech space, according to a study by US-based consultancy Bain & Company.
A growing influx of venture capital (VC) and private equity (PE) players coupled with entrepreneurial-friendly government initiatives are driving a break-out in the investment cycle in the region, says a new study from Bain & Company.
Healthy investment returns, a strong exit momentum, a maturing bunch of start-ups and enhanced coordination among Association of Southeast Asian Nations (ASEAN) members are also turning the region into a vibrant investment destination and a throbbing entrepreneurial hub.
Technology firms lead the way
This is perhaps the most opportune time for tech startups in Southeast Asia with VC and PE investment surging to record levels. The number of recorded venture capital deals touched 524 for 2017, marking a four-fold surge from 2012 levels.
Meanwhile, the value of private equity deals in Southeast Asian broke out of a decade-long phase of flat growth and surged 75% to $15 billion in 2017 compared with 2016.
Technology firms netted a major chunk of the fresh capital, accounting for 40% of the total deal count in 2017 compared with 20% in 2014, the Bain report highlighted.
During the period between 2012 and 2017, the region produced 10 unicorns—firms with a market valuation of $1 billion or more—whose combined market value reached $34 billion.
These unicorns include Singapore-based technology firm Grab and gaming startup Sea as well as Jakarta-based ride-hailing firm Go-Jek and airline ticketing and hotel booking services firm Traveloka. In terms of the combined market value of unicorns, Southeast Asia now ranks at No. 3 in the Asia-Pacific region, just behind China and India.
Over 60% of investors from South East Asia point to technology as their focus area in 2018-19 with fintech being the largest sub-sector, ahead of artificial intelligence and blockchain.
Meanwhile, Southeast Asia’s $50 billion internet economy is expected to increase four-fold over the next seven years, according to a recent study co-authored by Temasek and Google.
Growth to persist over the next five years
During the period between 2012 and 2017, the capital earmarked by funds focused on the region more than doubled. But can Southeast Asia maintain this momentum? The answer is in the affirmative.
Bain expects the overall deal value in the ASEAN region to double to $70 billion in the next five years compared with the level seen in the last five years. It also expects the region to witness the emergence of at least 10 more firms with a market value of more than $1 billion each by 2024.
Over the last decade, Southeast Asia recorded average economic growth of 7% a year, housed a growing middle class and posted a rapid rise in the number of digital natives. While these factors previously triggered strong investment growth in China and India, private equity investments in Southeast Asia over the last decade have been curiously low—between $6 billion and $9 billion. This figure will likely jump over the next decade.
Strong exit momentum is driving increased investment
A myriad of factors is expected to drive a rapid growth in investment activity across Southeast Asia, including an increasing number of venture capital and private equity players that are looking to ramp up capital flow into the region.
The number of investors that completed PE transactions with a deal value of $10 million or more surged to 124 in 2017, a 45% rise from the previous five-year average.
The growing pool of investors—including local venture capital funds and private equity funds, sovereign wealth funds and global funds—was lured to the region by its strong macroeconomic fundamentals, the opportunity to invest in emerging regional corporate majors, and a growing secondary market for deals of all sizes.
The spur in investment activity in the region is also driven by a maturing bunch of early-stage firms. Around 1,300 Southeast Asian firms have attracted seed funding since 2011, while 261 start-up entities elicited first-round funding in 2017 alone—a five-fold increase compared with 2011.
Besides, the faster pace of investment activity is supported by a strong previous five-year average. The surge in exit deal value points to a maturing investment cycle. The average exit deal value jumped to $16 billion, up 86%.
A slew of initiatives by governments in the region has also played a catalytical role in creating an ambience conducive for startup growth. For instance, entrepreneurs stand to get up to $30,000 in matching funds through Singapore government’s Startup SG Founder programme. The Singaporean government will give $3 for every dollar being raised from VCs.
The Vietnamese government also offers legal and financial support to 2,600 start-ups through its accelerator Vietnam Silicon Valley over the next decade. Moves like this have improved access to early funding rounds for startups.
ASEAN’s integration is spurring cross-border growth
In addition, ASEAN continues to lure in investors and entrepreneurs as member countries build deeper economic ties and make progress towards the establishment of a collective economy. The creation of a common trade zone has encouraged integration with the region, which has encouraged early-stage firms to expand across borders, accelerating their growth.
For example, two years after launching a ride-hailing app in Malaysia, GrabTaxi co-founders Anthony Tan and Hooi Ling Tan transferred the company’s headquarters to Singapore where they received $340 million in VC funding within just one year.
While Singapore remains the investment hub, dynamic startup ecosystems are sprouting up across Southeast Asia. Indonesia and Vietnam together generated 20% of the region’s total PE deal value over the previous five years. For 2018-19, investors expect Indonesia and Vietnam to increase their share of PE investment in the region.
The road ahead is not without hurdles. Competition is rising and valuations are surging—the average multiple of enterprise value to EBITDA for PE deals is 17, the highest level in a decade. Uncertainty over global economic growth also poses a challenge.
Despite this, Southeast Asia’s investment network has reached a crucial stage from where it is poised to grow. Continued investment momentum and a growing number of impressive entrepreneurial stories are expected to keep the capital flow to the region vibrant. Expect the birth of several more fintech unicorns to take place on ASEAN’s fertile start-up landscape in the near future.