Q&A: Gobi Partners’ Thomas Tsao

Q: Have you seen a large influx of Chinese capital into Southeast Asia?

A: It is coming, but mostly focused on the real estate side, especially in Singapore. However, I have noticed many Chinese investors following portfolio companies as they expand into Southeast Asia. For example, our Greater Bay Area (GBA) fund invested in WeLab, a Hong Kong-based digital lender. WeLab entered Southeast Asia through the joint acquisition of Indonesia’s Bank Jasa Jakarta. For Chinese investors who follow suit, it’s just the first part of their journey. They start by investing in Chinese companies in Southeast Asia; then when they recognise that Southeast Asian companies can achieve scale, they shift strategy.

Q: What do you make of the argument that “the next China is China” because Southeast Asia isn’t large enough or proven enough to take its place?

A: Twenty years ago, people said China wasn’t proven. I recall talking to US institutional investors in 2002 and they insisted that China would never develop its own technology ecosystem. One well-known US endowment said it would never invest in China because the country was only good at low-cost manufacturing and lacked original thinking. At the time, there were no Chinese private companies listed in the US, and on that basis, they said China was not proven. Today, China is big in absolute terms, but from a growth perspective, Southeast Asia is going to outperform. Annual average GDP growth is projected to be 8% over the next decade. China, Korea, and Japan have three common characteristics: they are ageing, they are exporters of capital, and they are good at developing technology. Southeast Asia is the opposite: it’s young, it needs capital, and it is adopting technologies. The two pieces fit like a jigsaw puzzle, which makes us very interested in Southeast Asia.

Q: How is Southeast Asia being impacted by US-China tensions？

A: The number of US guys visiting Southeast Asia has increased dramatically. A lot of US money went into India and now they are market mapping Southeast Asia. It’s not only a matter of US interest. With the rising tensions, Chinese institutional investors are looking more at Southeast Asia as well. The region will receive capital from both sides.

Q: There is a lot of talk about US-China decoupling and this contributing to a wider deglobalisation effect…

A: We're not de-globalising, we're re-globalising. The US has led the global order for the last 50 years and before that it was the British system. Now, networks are being rebuilt because China has emerged and India is going to emerge. I don’t think there will be a single hub or leader like in the past; there will be multiple hubs, including the US, China, and India. Accordingly, there is a concept called distributed innovation. When I started Gobi 21 years ago, the consensus was that the world's greatest entrepreneurs were only in Silicon Valley. Investors based in Silicon Valley thought that start-ups beyond a 25-mile radius of their offices weren’t worth backing. I’ve always thought that great entrepreneurs are evenly distributed around the world. That’s why I moved from the US to China and then from China to Southeast Asia. I get scared when everybody says the same thing.

Q: With the fundraising environment getting tougher, LPs are prioritising managers that have delivered distributions not just valuation mark-ups. What does this mean for Gobi?

A: We are currently raising our second growth fund for Southeast Asia. As of the end of last year, we had invested in 360 companies and generated 58 exits, mostly through M&A. Everyone says they care about DPI [distributions to paid-in] when the markets go down. When the markets are up, no one asks about it. In fact, when markets go up, you should ask about DPI, and when markets are going down, you should be investing more. But that’s hard.

Q: The China team spun out from Gobi in 2021, but the main Gobi Partners business still manages the Alibaba Hong Kong Entrepreneurs Fund and AEF Greater Bay Area Fund. What is your China strategy?

A: Gobi China will focus on renminbi-denominated funds. For example, they established a fund with Bosch. The AEF Greater Bay Area Fund is on the US dollar side. It focuses on the GBA opportunity and how the GBA connects China to regions like Southeast Asia. I see the GBA as phase three in the development of China’s venture capital ecosystem. Phase one largely focused on Beijing’s Zhongguangcun district. Phase two was more about Shanghai’s Zhangjiang district. When we set up Gobi in Shanghai, there were only three VC firms there; everyone else was in Beijing. But the government made it clear that it would promote Zhangjiang district, and now it’s doing the same with the GBA. I would add that Gobi China remains an important part of the Gobi family. How can you localise while at the same time getting the benefits of a larger platform? A lot of GPs wrestle with this issue.

Q: Why does Gobi have a Southeast Asia fund and several country-specific funds?

A: One day, we would like to have a big regional fund. Right now, what we do is largely driven by LPs and they have different goals. We have funds focusing on Southeast Asia, the GBA, Pakistan, and the Philippines. The Philippines fund makes seed investments, and it’s only USD 10m; that’s too small to accommodate the minimum cheque size of many LPs. At the same time, other LPs want real early-stage exposure. That’s why we have a multi-stack approach with seed funds, growth funds, single country funds, and single sector funds.

Q: What interests you most about Southeast Asia?

A: What Silicon Valley did in 40 years, China did in 20, and Southeast Asia will do in 10. And emerging markets like Pakistan and Bangladesh will do it in five years. Why is that? Because the pace of technological innovation is accelerating. When we went to China, nobody had a desktop computer, so China leapfrogged desktop and went directly to laptop; Southeast Asia has leapfrogged to mobile phones. China leapfrogged fixed line and went directly to 3G; Southeast Asia leapfrogged 3G to 5G. China leapfrogged credit cards and went directly to mobile payments; Southeast Asia went from no bank accounts to digital wallets.

Q: What markets and sectors are most appealing in Southeast Asia?

A: Indonesia's already mainstream. We are more focused on Malaysia, the Philippines, and Vietnam. As for sectors, financial technology is developing rapidly in Southeast Asia – 70% of the population is under-banked so the landscape can be completely reinvented. We have a portfolio company called PolicyStreet that does embedded insurance for Grab drivers, offering products that last days rather than years. To some extent, it is helpful to have seen China’s development and be able to apply that to Southeast Asia. For example, we were an early investor in Carsome, which is Southeast Asia’s largest car e-commerce platform and much like Guazi in China. However, Southeast Asia isn’t as competitive as China, so the margins are better.

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• Topics
• Southeast Asia
• Greater China
• GPs
• Early-stage
• Technology
• Gobi Partners
• Southeast Asia
• China