The Rise of Southeast Asia's Private Markets: Navigating the Growth Stage Capital Gap

Southeast Asia has emerged as a hotspot for private capital investment in recent years, drawing the attention of Limited Partners (LPs) seeking exposure to high-growth markets. The region's private markets have flourished because of robust economic expansion, a burgeoning digital economy, and increasing investor interest.

However, amidst this prosperity, a notable gap has persisted in growth-stage financing. Despite the influx of capital, only 8.5% of VC funds closed since 2015 have been at or above $250 million in size, leaving mature startups with limited options for securing expansion capital locally. While certain companies, like Grab, have attracted significant capital, more localized models face higher barriers due to the scarcity of growth-stage financing. Notably, there's a visible shift towards emphasizing growth-stage investing—a trend that LPs should closely monitor and capitalize on for future success.

The Appeal of Southeast Asia and the Growth Stage Capital Gap

According to PitchBook's 2024 Southeast Asia Private Capital Breakdown report, the region has witnessed exponential economic growth, with GDP soaring by over 56% from 2015 to 2023. This growth trajectory and a young and tech-savvy population are enticing for investors seeking high-growth opportunities. The surge in private capital deals, tripling from 2015 to 2021 and reaching a peak of $34.1 billion in 2022, underscores the increasing interest in the region.  

Moreover, 2024 holds promise for growth-stage startups. VC firms are diversifying their investment portfolios, with some, like the Vietnam-based Do Ventures, allocating more funds for growth-stage investments. Similarly, Singapore-headquartered VC firm Antler, for instance, plans to invest in slightly more evolved companies, expanding its focus to include Series C deals, as per a report by Nikkei Asia. New funds focused on growth stages, set up in late 2023, are expected to flourish as well, providing further opportunities for regional startups.

Challenges and Opportunities

The absence of growth-stage capital presents both challenges and opportunities for LPs. On the one hand, it inhibits the scaling of mature startups, hindering their ability to generate substantial returns and perpetuating a cycle of underinvestment and missed opportunities. However, it also signifies an untapped market opportunity for LPs willing to fill this funding gap and capitalize on the region's burgeoning tech ecosystem.

Exit opportunities have been limited in Southeast Asia. According to Pitchbook's report, since 2015, $79.3 billion in exit value has been generated by PE-backed companies, and over $70 billion has been generated by VC-backed exits. The four largest exits combined between the two strategies accounted for nearly half (46%) of exit values since 2015, highlighting the difficulties companies faced due to a lack of growth-stage funding.

Nevertheless, Southeast Asia's burgeoning digital economy, fuelled by the rapid adoption of mobile technology, presents a fertile ground for investment. Software-related deals dominate the landscape, comprising over 40% of all PE and VC deals. B2C companies have more than doubled their share of annual deal value from 2021 to 2023, reflecting the region's demographic and technological shifts.  

Furthermore, the influx of family offices into Singapore and government initiatives, such as Malaysia's allocations to boost local venture ecosystems, signal a commitment to fostering a conducive investment environment. Sovereign wealth funds like Temasek Holdings and the Government of Singapore Investment Corporation (GIC) play a pivotal role in nurturing the regional ecosystem by investing in growth funds and supporting local startups, which in turn attracts global LP commitments and professionalizes the ecosystem.

Strategic Considerations for LPs

Navigating Southeast Asia's private capital landscape demands strategic foresight:

1. Diversification: Given the concentration of exit values among a few deals, LPs should prioritize diversification across sectors to mitigate risk and maximize returns. Additionally, while reflecting its status as a financial hub, the concentration of fundraising activity in Singapore raises concerns about portfolio diversification. Firms in Singapore consistently account for over half of VC deals, signaling a potential overreliance on a single market.  

2. Growing Alternatives: Indonesia's venture scene is becoming a viable counterpart to Singapore in Southeast Asia. With nearly 300 million people, it is the region's most densely populated nation and provides the biggest business growth market. A distinctive feature of Indonesia is its extensive conglomerate network, which has been a key driver of its economic expansion. These large and diversified companies are keen on investing in startups to expand into new business lines and incorporate emerging technologies.

3. Local Partnerships: As LPs navigate Southeast Asia's private capital landscape, strategic allocation and partnership with experienced local players are crucial. Partnering with experienced local players and fund managers can provide valuable insights into navigating regulatory complexities and identifying high-potential investment opportunities.

4. Long-Term Perspective: Investing in growth-stage ventures in Southeast Asia requires a long-term perspective as companies navigate the challenges of scaling and market expansion. LPs should adopt patient capital strategies to support portfolio companies through various growth stages.

Conclusion

In conclusion, Southeast Asia stands at the precipice of a new era of growth and innovation, presenting LPs with an unprecedented opportunity to diversify their portfolios and achieve superior returns. As Southeast Asia's private capital markets continue to evolve, LPs must adapt their investment strategies. By recognizing the growing importance of growth-stage investing and deploying capital strategically, LPs can position themselves for long-term success in one of the world's most dynamic and promising regions for private capital investment.