Private funding across all investment stages in Southeast Asia reaches six-year record low: Google, Temasek, Bain report

The report finds investors are facing difficulties in all stages of the investment cycle, with 50% not meeting divestment targets.

Private funding across all investment stages in Southeast Asia has reached a six-year record low in the 1H2023, with Singapore experiencing a 63% y-o-y decline in funding, according to the 8th and latest edition of the e-Conomy SEA report by Google, Temasek Holdings and Bain & Company.

This can largely be attributed to the fact that participants of the digital economy have been making an unprecedented pivot towards financial sustainability, in the present challenging capital market environment, the report finds.

The report was presented on Nov 1 by managing director of Temasek, Fock Wai Hoong; Florian Hoppe, Asia Pacific leader in Vector, Bain & Company’s digital delivery platform; and Sapna Chadha, vice president at Google for business growth, strategy, and operations.

The report finds that investors are facing difficulties across all stages of the investment lifecycle, with exits and distributions being top of mind. Investors have also been increasingly urged to realise exits, deliver returns and distribute capital.

With many funds that were started in the mid-2010s now reaching the end of their fund life, investors feel the pressure on delivering returns. The report finds that 50% of investors partially  met or did not meet their divestment targets.

As compared to its global peers, Southeast Asian investors have lagged behind in delivering results. They have seen significantly lower distributions to paid-in capital, with many only returning an average of 40% of invested capital, while peers in China and Europe have returned 60% and 70% respectively.

Despite this, dry powder — which refers to the amount of capital raised but has yet to be deployed — has risen to US$15.7 billion ($21.51 billion) at the end of 2022 from US$12.4 billion in 2021. The report notes that this shows that there is “fuel” available to propel the region’s digital economy to the next stage of growth.

Meanwhile, a growing portion of deal activity is being funnelled into nascent sectors, including enterprise, healthtech, edtech and deep artificial intelligence (AI). However, digital financial services continues to be the top investment sector due to its high monetisation potential, according to the report.

Fock notes that in order to exit this funding winter, Southeast Asian digital businesses need to prove that quality deals with dependable exit pathways are readily available.

“Both investors and companies will need to be disciplined, as well as realistic around entry and exit valuations,” he says. “Valuation metrics need to reflect business and industry fundamentals and also reflect the current macro environment to a sustained focus on monetization models, unit economics and path to profitability is critical.”

He adds that businesses that are able to grow revenues, while demonstrating increasing profitability, will find ready capital willing to support the continued growth.

On a lighter note, Fock says that while the world is in the midst of challenging times, the shift towards driving monetization and proper growth is underway.

The report also finds that the region’s gross merchandise value (GMV) continues on an upward trajectory and is set to reach US$218 billion, growing 11% y-o-y. Southeast Asia’s revenue from the digital economy is also projected to reach US$100 billion this year, growing 1.7x as fast as the GMV.

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