Southeast Asia and India continue to capture heightened attention from investors in 2018 looking to capitalize on budding technology opportunities and emerging market plays outside of China, with private equity (PE) and venture capital (VC) investors capturing 170 tech transactions worth $2.6 billion in Q1 2018, said a report. This reflects sustained momentum from 2017, which saw the value of tech PE/VC deals in Southeast Asia and India nearly tripling over the prior year: $18 billion versus US$6.5 billion in 2016, said a combined report from Kroll and Mergermarket.
Since 2015, India has seen the majority of total PE and VC tech activity in the Indian and Southeast Asian markets, accounting for 56% of deal value and 71% of volume. As the next biggest market, Singapore accounted for 33% of deal value and 10% of volume, while Indonesia (7% of deal value and 7% volume) was also on investors’ radar screens.
According to Reshmi Khurana, Kroll’s Managing Director and Head of South Asia, the key recent developments in PE and VC tech investment activity in India and Southeast Asia can be attributed to the dynamic interplay of several factors.
Khurana says, “As traditional banks continue to face pressure from nonperforming loans in India, and increasingly in Southeast Asia, technology companies seeking capital have been turning to private investors. Meanwhile, governments in these geographies have been providing fertile ground for digitization and tech investment through policy initiatives, by incubating tech funds with traditional banks or by initiating e-governance projects to digitize government services, attracting investment in ancillary industries like enterprise solutions.”
Although new tech advances come hand-in-hand with a number of risks for PE and VC investors, Khurana says, “The number one risk is regulatory risk, aside from shared market and financial risks, especially when tech crosses into highly regulated sectors like financial services, insurance, and even media.”
Anticipating regulatory reaction to new technology is a complex challenge for investors as Khurana notes, “Businesses cannot predict regulation because regulators cannot predict how businesses will evolve. To some degree, all new technology is inherently disruptive to established business models or processes. Out of necessity, this often translates into regulatory action that is more reactive than proactive as the effects and consequences of a particular technology become known over time. We often see regulators later imposing controls around licensing or pricing to protect consumers and local businesses.”
Regulatory risk is also closely associated with political exposures. Given the possibility of a regime change in some governments, Cem Ozturk, Managing Director in Kroll’s Investigations & Disputes practice says, “A key factor to watch is whether aspiring political forces are running on platforms of economic nationalism, and then whether certain disruptive technologies are being framed as emblems of foreign influence.”
Ozturk says, “Policy change can still be ad hoc in some of these countries, leading to political uncertainty and risk surrounding changes that may affect tech companies. India, for instance, is on the path of tech liberalization, but may be prone to sudden policy shifts, as with its currency ban or alcohol prohibition. Overall, governments are committed to liberalization and job creation, but each government can still make policy decisions that disrupt certain sectors.”
Hot tech sub-sectors: Ecommerce, fintech, healthcare (medtech/pharmatech), and AI stand out for their advances in applications that cross and connect diverse industry sectors.
Top target countries: India saw the majority of total tech PE/VC activity in the Indian and Southeast Asian markets from 2015-Q1 2018, accounting for 56% of deal value and 71% of volume. Coming in second, Singapore contributed to 33% of value and 10% of volume, followed by Indonesia with 7% of both value and volume.
Foreign funds: While local or regional funds have been the dominant players in these markets, foreign investors have been making inroads. US investors took part in 25% of tech investment occurrences from 2015-Q1 2018, followed by Japanese (5%) and European (4%) funds.