Asia Partners dissects SE Asia’s funding gap and its search for ‘rhinos’

As tech unicorns have lost some of their magic, it’s time to turn to “rhinos” – companies that arrive at US$1 billion valuations based on their price-to-earnings (PE) ratios.

Asia Partners co-founder Nick Nash / Photo credit: Tech in Asia

Nick Nash, co-founder of Singapore-based private equity firm Asia Partners and former president of Sea Group, describes rhinos as creatures with four attributes: they’re humble, thick-skinned, systematic, and focused.

Founded in June this year, Asia Partners made its first investment in RedDoorz in August. The firm said the Singapore-based hotel startup fits its definition of rhino companies and is on the path to delivering tangible results. Asia Partners is looking to cut checks above US$20 million to support high-growth tech companies in the region.

KrAsia spoke with the leadership team at Asia Partners to hear them dissect the funding gap in Southeast Asia. They explained why filling that gap is key to unlocking another wave of homegrown companies with billion-dollar valuations.

In your report Southeast Asia’s Golden Age, you pointed out that the US$20 million to US$100 million investment is the crucial bottleneck in Southeast Asia, forming a gap of nearly US$1 billion per year. Why is there a “missing middle” in the region despite the influx of capital? 

Oliver Rippel: What is not in doubt is the existence of the gap. In China, about 30% of startups that raise a US$1 million to US$20 million round, then “convert” to raising a US$20 million to US$100 million round. In Southeast Asia, it’s just 20%. It’s a huge issue but also a huge commercial opportunity. There are only three firms that specialize in this growth equity segment in Southeast Asia versus over two dozens in the upstream segment of US$1 million to US$20 million.

It’s also very natural for the very small-end of the check size ladder to fill in first, with the middle coming in next. That’s very much what happened in China, where early-stage venture capital was dominant from 1993 to 2004, and then only in 2005 did growth equity emerge. Southeast Asia is about 11 years behind China in terms of affluence per capita, so it stands to reason that growth equity here would happen a bit later than in China.

What is surprising – and we think this is a function of the fragmentation of Southeast Asia – is that rather than happening “on schedule” in 2016, precisely 11 years after China growth equity emerged, it’s now happening in 2020. But better late than never, as they say, and it’s well-deserved by the terrific entrepreneurs of our region.

Kien Nguyen: Frankly, it’s a bit of a puzzle as to why that is. Let’s try to answer the question by process of elimination. Is it because of a lack of market opportunity? The answer appears to be no. Southeast Asia is already several years into its golden age of affluence – the zone between US$3,500 and US$7,000 per year of income. And it’s home to 9% of humanity. Those two facts together point to a clear market opportunity.

Is it because of a lack of companies that are funded by earlier-stage VCs? Again, here the answer is quite clearly no. Our report shows that there were over 500 series A and B stage investments – that is, US$1 million to US$20 million equity checks – from January 2014 to October 2019. And if Southeast Asia had the same conversion statistics as China, about one-third of those should scale over time to be ready for US$20 million to US$100 million equity checks.

Is it a lack of talent? Again, the data show a clear story: no. One key measure is the amount of on-the-job training. There are now 28,000 alumni of the first generation of internet platform companies, both homegrown and global players, and over 1,000 of those graduates have founded companies in Southeast Asia. While the region would clearly benefit from more computer scientists and data scientists, that’s not going to hold back the inevitable.

It’s important to look upstream to the suppliers of capital to potential growth equity firms that would serve the US$20 million to US$100 million. That is the global limited partner community, or the LPs. Over the past decade, the deep success of technology investments in China has understandably encouraged many of the world’s LPs to focus on China, with somewhat less emphasis on emerging markets.

India has been disappointing for many LPs in the past decade – quite the contrast to China – and frankly, we sense that many LPs are assessing whether Southeast Asia will be more like India, or more like China. Our research indicates the latter is a much more likely “movie trailer” for Southeast Asia, and sharing it widely has helped to advance the global perception of the region.