Investors are eager for a piece of Southeast Asia’s rapidly growing digital economy, and the region’s unicorns are ripe for picking
Investors are eager for a piece of Southeast Asia’s rapidly growing digital economy, and the region’s unicorns are ripe for picking
2021 is shaping up to be a year of mega flotations for Southeast Asia. The region’s most valuable unicorns are exploring plans to go public, either via the traditional IPO route or by merging with special purpose acquisition companies (SPACs).
Following the fundraising frenzy on Wall Street last year, some 320 SPACs with $100bn of cash to deploy are now on the hunt for acquisition targets, according to SPAC Research. A good number, including US-listed Bridgetown and Bridgetown 2 – which are backed by Hong Kong tycoon Richard Li and Silicon Valley billionaire Peter Thiel – have their sights set on opportunities in Southeast Asia’s new economy sectors.
If a deal is struck, it would be a coming-of-age moment for Southeast Asia’s emerging venture capital ecosystem. Preqin data shows that while IPOs feature as the most common exit strategy for venture capital (VC) in Asia at large (Fig. 1), Southeast Asia has suffered a drought of IPOs (Fig. 2). The last Southeast Asian tech unicorn exit was Singapore-headquartered consumer internet firm Sea Limited’s $1bn IPO on the NYSE in 2017.
The reason? Only a few companies in Southeast Asia are ready to be public companies in the US, notes David Gowdey, Managing Partner of Jungle Ventures in Singapore: “A SPAC is one of several on-ramps to the US public markets, but regardless of the path a company takes in its listing, it still needs to be ready to be a public company. That means it needs to have enough scale (valuation/ market cap) to receive attention from analysts, retail, and institutional investors, as well as a level of consistency or stability in its operations which enables it to accurately project its performance quarter on quarter.”
Indeed, in the last year, the raging US bull market and concurrent SPAC boom have created an attractive exit window for Southeast Asia’s unicorns. But the investment case for Southeast Asia is also clearer than ever.
Take Indonesia, the region’s largest digital economy. Willson Cuaca, Managing Partner of East Ventures, says: “There are 197 million internet users in Indonesia. That’s an internet penetration rate of 74%. Internet education is done; everyone knows how to do digital payments. We’ve seen how efficient the internet economy is, and because of that the whole region is charging forward. So, it’s a good time for private equity to monetize.”
Cuaca, who is based in Singapore, adds: “Everyone wants to invest in tech and so far everything is concentrated in the US, because that’s where the tech is. Sea Limited has been executing very well, and because Sea is the only company that US investors can use as a proxy for Southeast Asian tech, all that money has been flowing into Sea. Aside from them, everyone else is a private deal, and the public market needs more alternatives to invest in, like Gojek, Traveloka, or Tokopedia.”
Sea, which operates e-commerce, online gaming, and digital financial services, is currently the most valuable listed company in Southeast Asia.
To be sure, it’s not just US-listed SPACs that are searching Southeast Asia for targets. The success of SPAC IPOs with US investors is prompting more GPs from the region to launch their own blank-check companies. Gowdey told us: “I think there is pent up demand for a very narrow class of private company equity, which offers near-term alpha and most importantly near-term liquidity. Private market investing is a very difficult business, which is complicated further by its lack of liquidity.”
Betting on SPAC IPOs is different from venture capital investing, Gowdey notes: “The investors that I have tended to see participating in SPACs or pre-IPO rounds are public market investors who are entering earlier in an attempt to ride the additional pre-listing upside. The role of private equity is typically several stages prior to that, getting the company to a stage where it is ready to IPO. Venture capital is getting from zero to one.”
Cuaca also expects to see more private equity and VC firms in Southeast Asia launching SPACs in the coming months. “The question is whether they will be as successful as more prominent SPAC sponsors in the US,” he says. “Everybody is raising a SPAC, and it’s very easy to raise a SPAC. But what’s key is the de-SPAC. Does the sponsor have the ability to merge with a good target? In Southeast Asia, not many VCs have portfolio companies that are ready for the public markets.”
SPACs generally have two years from IPO to merge with a target or face liquidation, and competition for deals is fierce. Therefore, raising a SPAC makes the most sense for those private equity firms or VCs that have been investing long enough to own a portfolio of market-ready companies, while also holding necessary influence over that portfolio. As for those start-ups seeking late-stage growth capital, choosing the right SPAC sponsor could be key to the long-term success of their business, as well as how they perform in the public markets.