3Q analysis: India advances

1) Investment: New high, new driver

The final three months of 2020 were supposed to be an outlier. Pent-up investment demand, held back by the uncertainties of COVID-19, was finally released and capital flowed prodigiously into China, which was returning to business as usual. Growth-stage technology companies – key beneficiaries of the pandemic-enforced conversions to remote consumption – absorbed a disproportionate share.

Private investment in Asia soared to an all-time quarterly high, with more than half of every dollar deployed going to China and one-quarter going into early and growth-stage technology deals specifically. It couldn’t be repeated. Not as the post-COVID frenzy died down. And especially not as widespread regulatory action made investors wary of China’s technology sector.

But it has. Investment in the region reached $71.6 billion in the third quarter of 2021, just shy of the last year’s fourth-quarter total, according to provisional data from AVCJ Research. The figure will likely be revised upwards as details of previously undisclosed activity emerge. While China has retreated, India continues to go from strength to strength, ably supported by Southeast Asia.

In many respects, this is an extension of trends noted in the second quarter. By then, China’s technology sector was already feeling the squeeze with dozens of platform internet companies facing antitrust probes. Early and growth-stage investment slumped by more than 40% on the previous quarter, yet tech remained Asia’s mainstay, accounting for just under half of all capital deployed.

India and Southeast Asia made up the shortfall, as each market saw early and growth-stage activity in the sector surging to record levels. Across most of Asia’s major markets outside of China, private equity investment picked up in the third quarter from the second. Southeast Asia was unable to replicate its threefold leap, dropping slightly to $5.9 billion. Two-thirds of that was technology.

India, meanwhile, rose from $12.9 billion to $18.8 billion, shattering the previous all-time high set in 2020 when Reliance Industries-owned Jio closed its mega-round. Early and growth-stage technology investment climbed from $8.1 billion to $12.5 billion, making up two-thirds of the overall total. For every $1 put to work in the sector in China, approximately $1.50 went into India.

Three forces are at a work, one common to all markets, one shared with Southeast Asia, and a third unique to India. They are the general performance uplift in technology businesses during COVID-19, clearer sightlines to liquidity as domestic IPOs emerge as an option for pre-profit businesses, and India’s role as a back-end hub for global software-as-a-service (SaaS) players.

Between January and September, 29 Indian companies achieved unicorn status (Coinswitch Kuber, Rebel Foods, and Licious announced their rounds in early October), with 13 crossing the $1 billion threshold in the third quarter: four in marketplaces (broadly defined), three in education technology, two in e-commerce logistics, two in financial technology, one in SaaS, and one in gaming.

Notable entries include jobs marketplace Apna, which completed the journey just 21 months after launching its flagship product, and CoinDCX, India’s first crypto unicorn. Among the investors, SoftBank Vision Fund 2, Tiger Global Management, and Sequoia Capital India feature prominently.

Several existing unicorns saw vertiginous increases in valuation. For example, e-commerce player Meesho hit $4.9 billion in September, twice what it was worth barely five months earlier, while Postman rose from $2 billion to $5.6 billion. It is now India’s most valuable SaaS start-up, claiming a mantle that BrowserStack took from Freshworks as recently as June.

Investment in China has fallen as regulatory concerns have intensified. A restructuring of after-school tuition threatens to render commercially oriented business models meaningless; data privacy legislation may curtail US IPOs by certain internet companies; and restrictions on the use of algorithms to influence consumer choice could hinder consumer-facing platforms. The list goes on.

However, the drop from second quarter to third – $27.5 billion to $24.7 billion – is not substantial in relative terms, and the early and growth-stage technology activity held steady at $8.4 billion. Capital is not deserting the sector, rather it is moving from consumer-facing to enterprise-facing businesses: think semiconductor and artificial intelligence instead of social networking and e-commerce.

This trend became apparent in early-stage activity toward the end of 2019 as the share of technology sector deals that didn’t involve content or services started rising. It is now impacting headline investment numbers as well. Nearly 70% of early and growth-stage capital deployed in China in the third quarter fell into this category. In the final three months of 2020, it was 40%.

Moreover, investment remains strong in other sectors, such as healthcare, consumer, and electronics. These three sectors are, respectively, considered in line with government policies or general positivity regarding drug development and access to care, brands that address the evolving needs of the mass market, and industrial value-add through robotics and automation.

2) Exits: Sustainable rebound?

“The [financial technology] ecosystem is going through a phase of consolidation. I think there will be a dozen $100 billion-plus fintechs that consolidate the market globally,” Jack Zhang, co-founder and CEO of Airwallex, told AVCJ in August.

This is reflected in the fundraising might of payments behemoth Airwallex, which raised $200 million at a valuation of $4 billion the following month. Perhaps more pertinently, it is apparent in a global M&A surge that has begun to penetrate Asia. Zhang spoke after Square acquired Australia-based Afterpay, but before PayPal and PayU moved for Japan’s Paidy and India’s BillDesk, respectively.

These two transactions of private equity-backed businesses, worth $2.7 billion and $4.7 billion, sit atop a third-quarter exits list that makes for encouraging reading. In the first half of the year, there were only five trade sales of $1 billion or more and none surpassed $1.5 billion. Between July and September, five $2 billion-plus deals were announced across India, Japan, China, and Korea.

It all points to a resurgence in exit activity after 18 months of relative lethargy. In 2018 and 2019, average quarterly proceeds came to approximately $24 billion. They plunged to $7.6 billion in the first three months of 2020 and only surpassed $15 billion once in the subsequent five quarters. While public market sales and sales to other financial sponsors held up, trade sales struggled.

The key stumbling block was the ability of international buyers to conduct in-person due diligence under travel restrictions and their willingness to rely on virtual channels and third parties. Even as trade sales soared to $19.5 billion in the third quarter, up from $7.8 billion in the prior three months, it remains to be seen whether comfort zones have truly been extended.

Paidy and BillDesk are asset-light businesses, while their acquirers also belong to the new economy and have established operations in Asia. Two of the three other $2 billion-plus deals – China Logistics Property Holdings and Korea’s Doosan Machine Tools – were picked up by local buyers.

Of the 25 largest exits announced in the quarter, only three, including Paidy and BillDesk, involved strategic buyers not based in Asia. One asset was picked up by a regional strategic operating outside of its home market, 12 by local buyers, and nine by private equity. One was a partial exit on IPO.

The $12.3 billion in total proceeds from PE-backed IPOs represented the weakest quarterly total since the post-COVID revival. This should come as little surprise because the revival was led by China and the viability of offshore listings has been called into question, following the introduction of an additional security review for companies holding data on more than one million domestic users.

In the second quarter, 10 China-based businesses – primarily technology players – raised $8.9 billion through IPOs in the US. The third quarter total was zero. Numerous PE-backed companies are said to be repositioning themselves to list in Hong Kong, but that bourse was also quiet, with $594 million raised from two offerings. In dollar terms, this was Hong Kong’s lowest quarterly total in nearly three years.

The regional IPO total was buoyed by $3.7 billion for Korean game developer Krafton – Korea is now responsible for two of the four largest offerings in Asia in 2021 to date – $1.5 billion for Indonesian e-commerce platform Bukalapak, and $1.25 billion for India food delivery player Zomato. Bukalapak’s offering is the largest-ever by a PE-backed company in Indonesia, while Zomato ranks fifth in India.

Zomato has triggered a wave of filings from other pre-profit companies that were previously deemed unsuitable for local stock exchanges. The likes of Oyo, Paytm, Mobikwik, PolicyBazaar, and Nykaa have all joined the queue of companies looking to list. Much the same is expected in Indonesia.

3) Fundraising: Still challenged

Anecdotal evidence suggests a growing number of LPs are sufficiently comfortable with remote due diligence that they will consider backing smaller managers sight-unseen. Nevertheless, in the absence of a big-name close, Asia private equity fundraising in the third quarter was weak.

The $13.3 billion committed to vehicles focused on the region, or on specific countries within it, is the lowest in eight years. Retrospective revisions are to be expected, but the gap to the next-lowest total in recent years, which came in the first quarter of 2020, is nearly $5 billion.

Only three closes topped $750 million, each one contributing something different to the Asia fundraising narrative. First, Anchor Equity Partners raised $1.6 billion for its fourth Korea-centric but North Asia-focused vehicle. The manager spent five months in the market, demonstrating that a minority of GPs can accumulate sizeable pools of capital with relative speed.

Second, Temasek Holdings joined the Singapore government in providing S$1.5 billion ($1.1 billion) in initial funding for a co-investment vehicle that will anchor IPOs in the city-state. This is one of several initiatives – others include a pre-IPO fund established by EDB Investments – designed to promote Singapore as a listing destination for high-growth companies.

It says everything about the challenging fundraising environment that a government-backed fund outside of China’s renminbi-denominated space can achieve second place on this list. The move also sheds light on Singapore’s desire to reignite its equity capital markets at a time when technology IPOs are hot properties and Southeast Asian start-ups are exploring their options.

Third, Navis Capital Partners closed its eighth pan-regional vehicle at $900 million, falling short of the $1.75 billion target following a protracted fundraise. Southeast Asia – the Malaysia-based private equity firm’s core market – is not necessarily an easy sell to new LPs when travel is limited.

Concurrently, in a nod to the region’s growing secondaries opportunity, Navis secured an additional $450 million for a continuation vehicle that features five companies in its sixth fund that share a climate and sustainability theme. NewQuest Capital Partners led the investor group.

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• Topics
• Fundraising
• Exits
• Buyouts
• Expansion
• Technology
• IPO
• Trade sale
• Greater China
• Southeast Asia
• South Asia
• Asia
• Growth capital
• TMT
• India
• China