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Investors are doubling down on SEAsia's digital economy

September 10, 2021
Jungle Insights

Southeast Asian tech companies are drawing the attention of investors around the world. As of 2020, they raised over US$8.2 billion, representing a ~4x growth as compared to 2015. This trend has continued to 2021 — regional M&A activity hit a record high of US$124.8 billion in the first half of 2021, up 83 percent. Even if we take out Grab’s US$40 billion merger with U.S.-based special purpose acquisition vehicle Altimeter, the region’s M&A activity would still represent record levels. This begs the question — who is investing in Southeast Asia? Let’s explore the three key types of investors driving Southeast Asia’s tech ecosystem growth.

Big Tech

Southeast Asia has become an attractive market for major U.S. and Chinese technology firms. With a higher-than-global-average internet penetration of 70 percent, the region’s overall digital adoption remains nascent, with the pandemic only recently accelerating uptakes in sophisticated digital services such as e-wallets and online shopping. The region also holds less competitive saturation vis-à-vis China and the US, providing a long runway for digital growth.

China’s digital economy leaders — Tencent and Alibaba — are among the first to support Southeast Asia’s early eCommerce growth with investments in Sea Limited and Lazada, respectively. The two tech giants have since expanded their footprint into other internet verticals. Alibaba has backed Akulaku, M-Pay (eMonkey), DANA, Wave Money, and Mynt (GCash), whereas Tencent has placed bets in Voyager Innovations (PayMaya), SHAREit, iflix, OokBee, and Sanook.

U.S. tech giants have also recently entered the scene. In June 2020, Gojek closed a US$3 billion Series F investment round, with participating investors Google, Facebook, Tencent, and Visa. Google — together with Singapore’s Temasek Holdings — invested some US$350 million in Tokopedia in October. Meanwhile, Microsoft invested an undisclosed amount in Grab in 2018 and has invested US$100 million in Indonesian eCommerce unicorn Bukalapak.

Venture Capitalists

Southeast Asian tech startups raised venture capital (VC) investment of US$8.2 billion in 2020 — nearly mirroring the amount of funding raised in 2019 — despite being the region most adversely affected by the pandemic. In Q1 2021, startups in the region already raised US$6 billion, according to DealStreetAsia, positioning 2021 as another record year for Southeast Asian VC investment.

Southeast Asia as a destination market for investment capital is also rising in prominence relative to the rest of Asia. The table below shows the amount of regional VC investment growing by 5.2x from US$1.6 billion in 2015 to US$8.2 billion in 2020 — a very promising growth rate.

Southeast Asia also has many opportunities for VC investment relative to its market size. From 2015 to 2020, China witnessed nearly US$300 of VC investment per person; for Southeast Asia — despite a recent investment boom — this same metric sits at just US$47.5 per person, or just 1/6th that of China. This implies a substantial opportunity for additional VC to invest in developing the region’s digital economy. The region’s rising population and growth prospects are higher due to China’s population growth challenges, alongside the latter’s higher digital economy market saturation and maturity.

Family Offices

Southeast Asia has become a focus for family offices, which many choosing to establish themselves via Singapore, which is emerging as a global destination for them. Over 229 family offices have been registered in Singapore since 2020 the total assets under management is estimated to be around US$20 billion, according to the Monetary Authority of Singapore (MAS).

Asia-Pacific based family offices are increasingly allocating private equity capital to venture and growth-stage investments. Recent data shows a whopping 77 percent of Asia-Pacific family offices actively involved in growth-stage investments and 66 percent involved in venture-stage investments according to UBS. This compares to the global average of 70 percent and 57 percent respectively.

For example, Vulcan Inc. (Microsoft co-founder Paul Allen’s family office) opened its first international office in Singapore in 2019, while the family office of Google co-founder Sergey Brin — operated via Bayshore Global Management — established an office in Singapore in 2020. Both were joined by BridgeWater Associates founder Ray Dalio and Dyson founder James Dyson who also opened family offices in Singapore.

East Asian billionaires also joined the fray. Shu Ping, a founder of Haidilao, the world’s biggest Chinese hotpot restaurant chain, opened Sunrise Capital Management in Singapore in 2019. Meanwhile, the family office of Joseph Phua, managing partner of Turn Capital and co-founder of Taiwanese live-streaming app 17Live, acquired Taiwan-based blockchain firm Dapp Pocket and Crypto Exchange Coinomo in 2021.

What’s next for Southeast Asia Tech?

Southeast Asia’s growing demographics, favorable geopolitical climate, and proven exit strategy for investors makes it poised to increase its global prominence. Aggregately, it would be the fifth-largest economy and the third-largest population in the world after China and India.

With an average age of 27, Southeast Asia is also dominated by a young and tech-savvy population. Research below shows the YoY growth of the region’s internet users is estimated to have surpassed South Asia, China, and the U.S.

The region is also at a far earlier phase of digital economy development. Its digital economy only accounts for 3.7 percent of the region’s total economy, as compared to in the U.S., India, and China (where digital payment adoption has greatly exceeded the rest of the world). Southeast Asia’s digital economy share of its total economy is expected to more than double by 2025 yet, even at this level, this would still imply substantial room for further expansion when compared to the digital penetration experienced by other countries.

Southeast Asia will also likely rise to be a more equal peer to China and India, deserving a similar-sized allocation of a global investor’s portfolio. It will offer similar or better growth prospects and potentially lower political and internal regulatory risks for international investors to worry about.

The recent boom in M&A transactions and U.S. SPAC activity also bodes well for future investment flows even into early-stage companies. More investors will become comfortable investing in earlier-stage companies with confidence — paving well-trodden paths to crystallizing their investment returns via healthily-valued acquisitions or IPOs.

Although China, for now, remains Asia’s most active venture capital ecosystem, its long-term leadership position may be challenged by external factors such as ongoing geopolitical tensions with the West or domestically-influenced factors such as the curb on foreign listings and a crackdown on internet services. Fortunately, governments across the rest of Asia are taking cue from China in the right manner and not following their policies in terms of regulations and governance, and are welcome tech companies through incentives for the digital economy or sandbox type environments to experiment and test new technologies.

This is a golden opportunity for Southeast Asia to receive more direct investment in their tech sectors as international investors seek alternative opportunities.

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