The Southeast Asian region is growing and is set to see more foreign players buying into homegrown start-ups.
Judging from the berth of international venture capital and private equityplayers coming into the scene in recent years, signs are clear that Southeast Asian start-ups – including Malaysia – are hot on the radar for many of these exclusive financiers.
This comes as research from private equity giant Coller Capital affirmed that private-equity money is moving into Southeast Asia, with a view of conducting buyouts over the next few years.
According to the group in its Global Private Equity Barometer 2018, the majority of limited partners surveyed believe that the region will be an attractive destination for buyouts in the next three years, outstripping other Asian destinations such as China, India and South Korea, as well as Australasia.
“A net balance of a quarter of limited partners think that South East Asia will be more attractive for buyouts in the next three years. Elsewhere in the Asia-Pacific region, China shows a net positive balance of 14 per cent of limited partners, and Japan a net positive balance of 11 per cent.
“For no Asia-Pacific area do limited partners, on balance, think the outlook is deteriorating, but for several national markets positive and negative investor views are finely balanced,” it highlighted.
The Barometer researched the plans and opinions of 112 investors in private equity funds. These investors, based in North America, Europe and Asia-Pacific (including the Middle East), form a representative sample of the LP population worldwide.
This 28th edition of the Global Private Equity Barometer captured the views of 112 private equity investors from around the world.
Meanwhile, it saw that several Asia-Pacific countries were becoming less attractive for venture.
“The picture for venture capital is more varied, with the attractiveness of developed markets such as South Korea, Japan and Australasia seen as deteriorating by a net balance of investors,” it said.
“Venture in the emerging markets of the region is, on balance, seen as becoming a little more attractive. This was on the back of private credit fund returns are exceeding expectations.”
According to the research, for a good number of limited partners, returns from private credit funds are proving pleasantly surprising. Almost 30 per cent of them say that their European private credit funds are performing better than they expected.
Beyond Europe, 22 and 16 per cents of limited partners say the same for Asia-Pacific and North American credit funds respectively.
Money in lending
Thus, it comes as no surprise for Malaysian start ups – particularly those in technology – now see investors keen on investing at an earlier stage of a promising start-up’s investment cycle.
This comes as many success stories such as Grab, Catcha Group, Lazada and so on have reaped healthy returns for their investors.
Another key indicator is a move made by Malaysia’s own Sunway Group via its new venture capital fund named Sun SEA Capital, proposing to spend up to US$50 million on digital startups in Malaysia, Thailand, Singapore, Indonesia, Philippines, Vietnam and Hong Kong.
Sunway Bhd, through its subsidiary Sunway City Sdn Bhd signed an Initial Exempted Limited Partner Agreement (LPA) — a limited partnership agreement that is used to form a private equity fund, but structured as a limited partnership.
This partnership is made up of the resources and business smarts of the Sunway Group, combined with the experience of established venture capitalists Koichi Saito and Kuan Hsu.
The pair Koichi and Kuan enter this partnership with the experience of forming Singapore-based KK Fund in 2015. Launched in 2015, KK Fund has made 20 investments including Kaodim, TheLorry, Hostel hunting, Supplycart, Policystreet and CapitalBay.
In Sun SEA Capital, the pair will be acting as the fund’s consultants and directors, as well as playing key roles in the fund’s investment committee.
Better time of doing business
All these come at a time when businesses cite optimistic prospects in the way of doing business, specifically after the 14th General Elections (GE14).
The latest RAM Business Confidence Index (RAM BCI) readings suggested that firms remained upbeat about their business outlook going into 3Q18 and 4Q18.
RAM Ratings noted that the Corporate and small and medium enterprise (SME) indices again charted positive sentiment at a respective 56.8 and 52.1, with continued improvement in their turnover and profitability sub-indices.
The ratings firm further noted that the sustained positive readings indicate Malaysia’s economic resilience in the first half of 2018 (1H18) is likely to carry through to 2H18, supported in particular by the Corporate segmentÕs firm optimism.
“The results of our survey also show that the outcome of the GE14 may have partly contributed to the more upbeat sentiment among firms,” it said.
“The better business sentiment post-GE14 is observable across all sectors for both Corporates and SMEs, except for the Corporate construction sector, which shaved off 1.0 point.”
On the proportion of firms citing rising cost of doing business as their main challenge, RAM Ratings pointed out that it was also much lower after GE14, likely on expectations that the zero-rating of GST and the three-month tax holiday until the sales and services tax (SST) is reintroduced in September will allow businesses to achieve some cost savings.
As for SMEs’ access to bank financing, RAM Ratings stressed that it is important to ensure SMEs better access to funding, to support the countryÕs economic growth.
“Furthermore, SMEs’ turnover and profitability expectations have risen in the last three surveys – a sign pointing to potentially a greater need for financing.”
All these serve to ask the question: what do venture capitalists think of investing in Malaysian start-ups?
Views from venture capitalists
On this note, BizHive Weekly takes key insights from renowned investors at an Investment Outlook forum during the Borneo Entrepreneur and Investment Convention (BEIC) recently held in Kuching.
The panel features panelists all involved in venture capital. They include TBV Capital Sdn Bhd managing partner Andrew Tan, Janson Group chief executive officer (CEO) and founder Dr Janson Ang, KK Fund Pte Ltd founder and general partner Koichi Saito and Captii Ventures Pte Ltd associate director Low ZhenHui.
The forum touched on topics ranging from their take on investment opportunities in today’s economy to the criteria for startups which are hoping to get allocations from venture capital funds:
Q: Where do you see investment opportunities in today’s economy?
Janson: I personally roll my profits into different diversifications of business. I believe in ‘splitting my eggs into different baskets’, so I heavily invest back whatever that I have gained from any of my businesses into more businesses.
This is one of the growth engines that I strongly believe in. On top of that, I also look into landbanks for acquisitions. I like to buy things cheap, keep it for long term, sustain it and probably cash out.
These are some of the two modules that I always believe in: reinvestment and also buying something or purchasing something that has long term values in the long run.
Andrew: The biggest opportunity now is the smartphone. This is where your biggest asset is. To me, it is simple, the biggest asset now is what I call ‘attention’. Attention is the new currency.
Whatever you could get people’s attention, that is the best opportunity. We are spending too much time on smartphones and this is changing our lives on a daily basis – and this is where your business should be. That is where I see the opportunity.
Koichi: For us doing online financial technology, opportunities are in fintech and logistics. In fintech, especially, we are looking at online banking, online insurance and also the logistics. With these, the infrastructure in Southeast Asia is very much immature and that means there is an opportunity. We are looking at investments in that space.
Q: KK Fund recently did a joint venture with Sunway Group to create a new venture fund called the Sun SEA Capital. This Sun SEA Capital has a planned fund size of US$50 million which will invest in Southeast Asia and Hong Kong startups. How do you identify what to invest and what not to invest?
Koichi: As you know, Sunway Group is a huge conglomerate in Malaysia and they have a lot of offline businesses or traditional businesses such as a hospital, retails, hotels, and even an amusement park.
We would like to leverage on Sunway’s assets into the startups. We are looking at O2O — offline to online, or online to offline. This is the same also with healthcare; as Sunway has a hospital so we would like to leverage the healthcare space with Sunway. The healthcare, O2O and retail (divisions)… so we are looking at startups that are related to the Sunway Group’s business.
Q: What is the criteria for startups to be selected to get these investments?
Koichi: We are looking at founders’ capabilities, we are always looking for good founders, but people ask me what I mean by a good founder? First of all, in the beginning, founders don’t have anything but network and expertise in the industry from their past experiences.
Thus, the new venture should be related to their past experiences. Plus, if they have family business background, that would be a huge advantage. We call it an ‘unfair advantage’ in the industry.
The second thing we look at is commitment. Some founders ask me, ‘I am raising money, but we have three businesses, A, B and C, are you interested in one of them?’ No. Founders should focus on only one business and they should put their whole mind into one project.I would like to see commitment in that respect.
Q: As an observer of the market in Southeast Asia, I believe you have highlighted a few markets in the region as growth opportunities? Can you share your thoughts on that?
ZhenHui: I think for us, because of our few years of experience investing across Southeast Asia, swe always end up looking back to Indonesia and Vietnam being highly attractive markets, especially when it’s aligned with our investment mandate in fintech.
The population of these markets are huge: three times and nine times respectively for Vietnam and Indonesia compared to Malaysia. What makes them a lot more attractive are the high number of underbanked or unbanked populations in these markets.
For instance, we are talking about maybe sub-10 per cent or single-digit percentage credit card penetration rates in both of these countries. Even only one out of three people may have bank accounts in these countries.
This is a stark contrast with Malaysia whereby maybe about 80 per cent of the population have a bank account.
The winners that we see coming out of these markets would be players who are comfortable moving out of the cities where most of the urban populations are not what they are looking for.
They have got to go out to the tier two, tier three cities and the towns where people don’t even have access to banks, much less banking products and offer them the services that they need like lending or even a way to transfer money to one another.
This is where e-wallets come into play. The companies that can execute fast, scale quickly and capture the market — they are the ones who will emerge as winners in coming years.
Q: Previously, you’ve all dabbled in property and several sectors. How did you know to idenify investment opportunities in these sectors and why did you go into these sectors in the first place?
Andrew: I don’t actually know what to invest — it is really a lot about the business acumen. To me, I focus a lot on trend, what is moving in the market. I see business from a very different angle, every business is on a ‘four-season’ basis. There are times when it’s spring, autumn, winter or summer — for every different season of the business I will be doing something. Even in the same industry, I will do different activities.
For example, when my business is getting a lot of attention, I will heavily promote my business to the market and start closing sales. When times are bad, when it’s ‘winter’, during hibernation time, I start to work on my system, my database, and I try to follow up on things.
Then, when the business goes into the ‘autumn’ season, I focus on preparing for my next campaign launch, for my next promotion, identifying the people that I am targeting.
During the ‘springtime’, I am ready to promote heavily in the market.
To be honest, I have failed 95 per cent of my businesses. But the key thing is, everytime I go to ‘war’, I come back 100 per cent safely.
There’s no right or wrong. It’s just that it takes a lot of hard work. If I set my goals, my vision would dictate my actions, I do not let my emotions take control of my actions. Things that I have invested in, I just give all out, I work with people around me. I am blessed to have a big team, teamwork is the thing that made me what I am today.
Janson: I strongly agree with what Andrew mentioned. When it comes to a business — whether it’s a potential business or not — sometimes it is not easy to value. It is based on guts, feelings, sentiments and emotions. If you think it is good, it is good. If you think it’s not so good, then don’t take the risk. Basically, it is just that.
But of course, being an entrepreneur myself, we do exercise through this experience from the given time of all knowledge that we should be able to analyse whether this business can bring us to a further level or not, how is the scalability in terms of the business structure and the business model?
With all this aspects (taken into consideration), it gives you a better indication of whether this opportunity is deemed fit for you or not.
That’s where you decide, ‘what next?’ and ‘how next to go about doing it?’ It’s very much basically up to you, because you’re going to invest in this. You feel that it’s highly potential, how you want to scale it and everything is very much determined by your own nature.
Q: With changing technology trends, what are your thoughts about the way this influences consumer trends?
Koichi: It’s very obvious that people are starting to buy anything online but in Southeast Asia, I still believe the impact of offline is huge. I believe that most businesses cannot compete only online so companies should have close relationships with the offline businesses or traditional businesses.
That is why I am very excited with the fund with Sunway Group. Startups should leverage the big offline players and they should work with the offline players. In Southeast Asia, we still need some offline connection.
Andrew: Consumer behaviour is changing every single moment. I personally feel that 10 years down the road, I think 30 per cent of the kids will grow up with artificial intelligence (AI).
Whether you like it or not, AI will be part of your life. I think AI is going to influence people’s lives, you need to start to look into smart homes or smart cities.
Kids will be exposed from talking to Alexa (Amazon) and Siri (Apple), they will start getting into that kind of mode and this is what I look at where the future is heading to.
ZhenHui: To echo what Andrew has talked about, AI being the next step forward and what we see for financial technology in a market like Malaysia where people are pre-plugged into the banking system, the next step forward would be in the growth of value or investments.
And that’s where we think AI is going to play a very important role because there is only so far that human experience and knowledge can take us but there’s always the room for error and that can be refined with AI basically.
Questions from the Audience
Q: What do you see as being the future of the venture capital (VC) industry? What do you think is going to happen to it in five to 10 years time? Is it going to be doing the same thing or is it going to be doing something radically very different?
Koichi: I think that would be different actually in 10 years in Southeast Asia. Now we are investing in tech startups and we are kind of waiting for the startups to be big enough and to sell and to make big money.
But in Southeast Asia again, I feel like there are a lot of opportunities in the offline base. I think there are more VCs here becoming like private equity (PE) players, investing in offline and online and then combining and then making it bigger, something like that.
I think for both PE and VC players, I think they are going to the same space which is investing in both offline and online. I think that would be the, I guess the future plan in the future.
Andrew: Personally, I believe the future trend will be CVC – corporate venture capital, rather than individually owned and raised from limited partners (LPs), I think CVC will play a major role in the next five to 10 years. As with me and Koichi, our funds have a life span but as for a CVC, they can structure an evergreen fund where they can keep on investing without exiting.
CVC will actually give one thing to the market which is the accessibility to their customers. They can provide that sandbox environment, the customer base, the market accessibility and the industry expertise to the company they invested in. What the startup can do for CVC is that they can help those companies, I believe there’s a lot of corporates now that is looking to adapt into technology.
The key challenges is not about adaptability, you cannot teach an old bird a new skill. Startups is going to give them one good thing called corporate innovation. They are going to assist them a lot in shifting their minds, looking at how technology is going to blend into everyone’s lives.
In terms of VC, you will start to see more VCs will be very specifically, vertically investing in a particular industry. For example, I have just setup a new US$16 million-fund whereby we are focusing on impact investing. Our investment metric is to provide basic healthcare to rural areas. We want to provide clean water to victims of disaster areas.
We want to provide clean water to rural areas, we want to invest in impact that is going to change the next three billion people’s lives. We want to look at agriculture, how are we going to use Industry 4.0, the big data and internet of things (IOT) to help agriculture on disease prevention. This is what my new fund is about. That is how I see in future, maybe VC will be very specifically investing in one particular vertical (segment) and the rise of CVCs.
Koichi: I agree on the rural part. The keyword ‘rural’ will be a trend in the future. The rural areas which do not have the infrastructure.
Janson: If you are looking for one, you are speaking to the right person because our organisation is basically involved in a lot of corporate venture exercises. We are heavily investing into some very good opportunities and potential markets.
If you are actually in search of such funds or services or a corporate that could actually help to bring you to the next level, we could talk about it. This is our current focus, at least for the next five to 10 years. Our organisation has actually made buffers for such venture capitals.
ZhenHui: From our standpoint, Captii Ventures is a CVC and it has collaborated with PE firms in investment deals. I think the current landscape that allows for this to happen is the cheque sizes that we write – that most VCs in the region write – may not really be enough to take an entire series B or series C round.
There’s a lot of collaboration and a lot of VCs in the region are pretty friendly with one other. I hope that won’t change in the future but frankly we are looking at the trends of new funds which are raising multi-US$100 million funds.
Eventually, as more and more exits are seen in Southeast Asia and LPs are a lot more comfortable taking risks in VCs, you might be seeing VCs going it alone in even late stage investments and they are not necessarily the corporate investors or the strategic investors.
Q: In the next five to 10 years’ time, how would e-commerce affect the brick-and-mortar stores? Will e-commerce totally kill the brick-and-mortar stores? How could we save brick-and-mortar stores or make them online?
Andrew: E-commerce is never going to replace brick-and-mortar stores. In the future, you will see ‘brick-and-click’, that is what I see. Humans still need that personal touch, we still need that experience. I think in the future, you will start to experience AI, facial recognition, cashless payments through QR codes, that is my view.
Can you imagine if e-commerce were to replace brick-and-mortar, what about those who do not understand about computers? Do you really buy your vegetables and fruits just by clicking on that computer? Don’t you feel that is so stressful as you have been working on the computer for days and nights and now you are getting your food through online as well?
You still need to go to the hypermarkets to feel the goods, the kids need to experience what the real food is all about. It’s all about experiencing.
To me, e-commerce has two business models. One business model is the ‘Amazon’ business model where they become the biggest aggregation of all the suppliers and yes, they have very high gross merchandise value (GMV) but they are also operating at a very high operation cost where the profit margin is very low. As I am from ebay, I prefer ebay’s business model like Alibaba. We are aggregating all the offline to go online while you still deliver your experience offline.
I believe in the future, you will walk to a shop where there’s no one serving you but you will just want to shop to experience the product.
Then you just scan the QR code or maybe through facial recognition, then you just click on your shopping and by the time your reach home, the things will arrive at your house. That is how I look at e-commerce (in the future).