The future for exits in Southeast Asia is M&A, not IPO

Photo credit: Pexels.com

An initial public offering (IPO) may still be the most appealing way to exit for most tech startups in the US, China, and India, but not necessarily in Southeast Asia.

Singapore-based VC firm Golden Gate Ventures predicts in a report that mergers and acquisitions (M&As) will dominate future exits in the region, with a minimum of 250 M&As occurring each year beginning 2020. That’s a whopping 500 percent increase from the 2015 figure, it says.

“In the United States, a successful exit involves going public. The financial returns generated from listing on NASDAQ or the LSE usually mean that both investors and entrepreneurs alike have generated a pretty healthy return on their investment,” explains Vincent Lauria, managing partner at Golden Gate, in the report.

“In Southeast Asia, it’s the opposite: a trade sale will often result in larger financial returns than going public, especially if the acquirer has a strong strategic interest in the region,” he adds.

Mergers and acquisitions in Southeast Asia will grow 500 percent by 2020.

To gauge the potential for exits, Golden Gate looked at the growth trends of IPOs and M&As in Southeast Asia in the past decade. The sheer number of M&As over the years simply dwarfs that of IPOs and results in a non-linear trend, which suggests “an exponential growth pattern.”

In the past 10 years, there have been 145 percent more M&As than IPOs, the VC firm points out. Of the top 10 M&As by value, eight occurred only in the last three years, while there was just one IPO in each of all the 10 years except 2014, which was an outlier with five IPOs.

Look at emerging markets for growth

Golden Gate attributes the increase in M&A activity to global funds looking at emerging markets for new investment opportunities.

Southeast Asia has often been overshadowed by China and India, but these two are starting to approach a hard ceiling on attainable returns on investment, not to mention China is experiencing slower economic growth.

Southeast Asia, on the other hand, has all the good numbers and fundamentals – it has a population of over 600 million and gross domestic product worth US$2.3 trillion, which is the seventh largest in the world and projected to rise to the fourth spot. Facilitated access to markets is underway through the ASEAN economic integration, there’s a rising middle class, more people are consuming digital content and paying for goods and shopping online, and mobile phone and internet penetrations are climbing.

“Regional and global acquirers are just now fully realizing Southeast Asia’s potential as a real growth market,” says Golden Gate.

This is evident by the recent growth in institutional funds. In 2015 alone, several Southeast Asia-focused funds, with total capitalization of as much as US$2 billion, launched. Overall, capital invested in emerging markets has climbed 47 percent since 2013, Golden Gate says, and to compound this growth, funding rounds are increasing in size and frequency.

As of March 2015, 13 companies in Southeast Asia had raised US$20 million or more in funding, implying valuations in the hundreds of millions of dollars.

Protectionist policies also a driver

IPOs remain a possibility