Chua Kee Lock, CEO of Vertex Holdings
“Having weathered both good and bad times for more than 30 years, today we see a lot more successes and opportunities within the startup ecosystem. Funds have to scale proportionally to capture better, bigger opportunities moving forward similarly,” says Chua Kee Lock, CEO of Vertex Holdings.
“Naturally, valuations will continue to increase as more venture capital flows into Southeast Asian startups,” he stresses.
The first and possibly the most natural reason for capital inflow into Southeast Asia (SEA) is the opportunity to capture the attention of a young and tech-savvy population in this part of the world. Gen Z and millennials are natural users of smart apps, and they will grow in their consumption power in the future.
When startups can prove that their business model works with this group of consumers directly or indirectly, VC money inevitably pours in because investors are looking to capture the growth opportunities.
The second reason for capital inflow into SEA is that VC as a general category has performed better than other asset classes. In the last 10 years, VC money has been pouring into China and the US, and to some extent, Israel, achieving outstanding returns in the range of 20-30 per cent IRR.
The SEA market looked much smaller in relative terms then. Today, it is much bigger, with regional VC investment growing to US$8.2 billion in 2020, more than four times as compared to 2015.
The market has seen more exits such as Razer, SEA, Bukalapak and Grab, so overseas LPs are seeing opportunities to create value in the Southeast Asian market.
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“VCs in Southeast Asia today are receiving a lot more inquiries from LPs, and we will continue to see this trend, especially with the US-China trade war looming over the next few years because people are looking for other places to deploy capital,” says Chua.
What does Vertex as an investor make of rising valuations?
Chua believes that the natural result of massive liquidity coming into the SEA market is inflation. Nonetheless, valuations are not necessarily unsustainable. If an investor expects to exit at a higher valuation, then the investor should be comfortable with the higher valuations today. “Whether a valuation is acceptable, it’s always relative to exit,” he points out.
Keen observers of the Southeast Asian market agree that the past few years have been red hot. With the US government printing large amounts of money in response to the COVID-19 pandemic, that money has come into the stock markets, prices in the public markets are driven up, and thus leading to a knock-on effect on private market valuations.
While conventional wisdom may tell us that at some point, the music will stop and the market will enter a downturn, the past two years have been very unusual because the frothiness in the market has been continuing for some time, buoyed by the fact that many countries are printing money, to the tune of trillions of dollars in total.
Chua believes that it is only a matter of time that the market will take a breather. As an investor in technology and innovation, Vertex is laser-focused in ensuring that the startup team and their technology are real and not fluff.
“Until the market comes down, Vertex may overpay slightly, but we believe that the returns will come back. The key is to invest in the right tech and right people,” he says.
Southeast Asian investors may expect better exit opportunities
Fifteen years ago, one could count with two fingers the number of IPOs there were in China – Sina.com and Netease. Fast forward to today, there have been so many IPOs of Chinese tech companies, both in the US and in China.
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Chua expects SEA to go through the same growth in terms of the number of exits. While VCs in Southeast Asia are just counting IPOs by the fingers now, the IPO bell should be ringing every day at some point in the future.
“It takes around six to seven years to build a company, and we are currently seeing many companies that are around three to four years old in the Southeast market, which will be a lot more mature and exploring exit opportunities in another three to four years,” he says.
Given that Vertex’s portfolio companies are at different levels of development, Chua believes that it is not a sound strategy to accelerate the momentum of portfolio companies now so that they can catch the bull market.
“Going to the public market is a way to raise larger sums faster. Some companies are getting close to that, and we encourage them to go to raise more money. But if they are not ready, we don’t force it because the company can collapse after the IPO. We’ve seen it happen,” says Chua.
In the ideal case, Vertex will help the founder build the company very well and grow its strength before eventually taking the company to IPO. But only a few would be able to scale up so fast and so well.
In the absence of that scenario, if somebody offers to buy out the company at a better price via M&A, Vertex will evaluate if it can do better by waiting versus what else its investors can do with the money. “It is very nice to have a paper mark-up, but eventually, it is about real cash distribution and returns to the investors,” says Chua.
On the recent regulatory clampdown in China that has seen Chinese tech giants pulling out of their US IPO plans, Chua sees that this is part of the larger bifurcation trend between the US and China, starting from trade to technology and now extending to capital.
Vertex’s own China fund is the immediate action step Vertex has taken to avoid sectors that are not aligned with Xi’s common prosperity policy push. However, Vertex is not too worried about the exit situation in China. “Chinese tech companies still have a good range of listing options like the HKEX, the Shanghai Star Board and the Shenzhen ChiNext board,” Chua stresses.
In the future, more Chinese companies will find it more convenient to list in Hong Kong or mainland China, and fewer of them will go to the US. In contrast, the US is still pretty much the only option for SEA tech companies looking to IPO. But there is hope that this will change.
Also Read: An overview of the Southeast Asian tech investment landscape
Singapore Exchange announced in early September the new rules that enable Special Purpose Acquisition Companies (SPACs) to list on the mainboard, giving companies an alternative capital fundraising route with greater certainty on price and execution. Chua welcomes this development.
“In the US, if you are not valued at US$5 billion and above, it is tough to IPO. In Southeast Asia, if you are around US$2.5-$3 billion in valuation and you want to raise money, the SGX approach gives you an additional avenue to raise money at a decent valuation and continue to grow,” he explains.
“SEA VCs should support SGX’s new SPAC listing framework and can see how to leverage it to grow their portfolio companies.”
Standing out from the crowd in a competitive VC landscape
There is no shortage of capital in SEA, and VCs are dispensing checks very quickly. When asked about how Vertex differentiates and “proves its value” to entrepreneurs in such a competitive VC landscape, Chua confidently points out that while VCs typically help the entrepreneur in business development activities, Vertex has specialised employees across its six funds helping all portfolio companies.
Vertex also dedicates much more time and energy to helping to hire talent than the usual VC. Lastly, and perhaps most importantly, Vertex also mentors founders on how to scale and what they should focus on, and how to stay the course when things are not going well.
Vertex sits down with entrepreneurs to think through and address problems and helps them along their growth journeys. The true yardstick of being a value investor is what the founders who have been backed would say about the investor.
“For SEA, when prospective portfolio companies ask us to demonstrate value, it’s straightforward. I can always refer them to other founders whom Vertex has backed before,” Chua says, “… and the founders would share personal anecdotes of how Vertex has supported him (or her) in their journey.”
Vertex Holdings is not your typical venture capital investor. In July, Vertex also announced its maiden corporate bond issue. This was the first SGD-denominated public, a corporate bond issued by a global venture capital holding company.
By having Vertex Venture Holdings, the entity owned by Temasek, issue bonds, the capital was raised at a 3.3 per cent interest rate and pumped into the six Vertex funds (where Temasek-owned Vertex Holdings is an LP).
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The standard LP-GP structure at the fund level does not change, and Vertex Holdings raises bonds. Because each of the funds generate 20-25 per cent IRR, it provides a good return on capital relative to cost.
The road ahead
As the CEO of the oldest VC in Southeast Asia, Chua has met, evaluated, invested in and advised countless founders. He has also been through a founder’s zero-to-one journey himself.
In terms of entrepreneurs, he is looking for driven people, where the CEO/Founder has a clear sense of direction and can mobilise people to get things done well.
The CEO/Founder also needs to see the big picture and communicate well to rally the team to have a sense of shared purpose.
While new market developments surrounding capital inflow and exit opportunities have profound implications for both VCs and founders, Chua is a strong believer in the following two unchanging operating principles:
- First, invest in a good team and real technology. This will ensure the returns. Even if a target’s valuation may be somewhat overpriced today, this is still a good investment if the exit opportunity is commensurately big.
- Second, compare the exit opportunity or value offered against what else the LP can do with the money. SPAC and IPOs can be pursued if these options raise money at a decent valuation and allow the business to grow. Otherwise, it may well make sense to cash out the returns to investors via M&A with the right price and timing.
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