Fund focus: Vertex emphasizes realisations

Vertex Ventures Southeast Asia and India (VVSEAI) declined to disclose performance data, but the early-stage investor claims that – based on feedback from LPs – returns from its existing vintages exceed the top quartile for the region. Funds I and II are largely exited and Fund III, raised in 2017, has realised about half of the 28 investments made. Most realisations have been sales to growth-stage investors.

“When companies achieve a certain scale, they become interesting to private equity firms, but they need to be growing and have good cash flow,” said Ben Mathias, a managing partner at VVSEAI. “We used to be viewed as old school because we kept emphasizing unit economics and cash flow. It has worked out well for us – private equity investors approach us for exits.”

Ride-hailing platform-turned-super app Grab, which featured in Funds I and II, was exited via a growth-stage round. So were mother and baby retailer FirstCry and logistics provider Xpressbees. Trade sales are the next most prominent exit channel: Recko to Stripe, CloudCherry to Cisco, Flutura to Accenture, Active.AI to Gupshup, and GlowRoad to Amazon.

A handful of companies are regarded as potential whole fund returners and are being supported through IPO. These include financial technology players Nium and Kissht, analytics platform Patsnap, and fresh meat retailer Licious. Two of the four are Indian, but Mathias isn’t put off by the poor post-market trading of the country’s first wave of pre-profit internet IPOs.

“Most of those stock prices have crept back up this year in response to strong performance. The companies realised they had to get serious about profitability, they did that, and the market rewarded them,” he said. “There’s a window for IPOs in India now, and more companies are preparing to list.”

That renewed emphasis on profitability isn’t limited to the public markets. Mathias argues that profit isn’t hard to realise in India given relatively low operating costs. The key difference is the absence of global growth-stage investors that previously pumped capital into start-ups while telling them that economic sustainability was only optional.

“Our portfolio companies are raising growth rounds from investors we want to have in the cap table – groups that are focused on governance, capital efficiency, the right metrics,” he said. Southeast Asia is much the same. Businesses that turned a blind eye to unit economics are now struggling to raise capital.

VVSEAI recently closed its fifth fund on USD 541m, comfortably exceeding the USD 450m target. Japan Investment Corporation (JIC), International Finance Corporation (IFC), and German development finance institution DEG came in as new investors, while Cathay Life Insurance re-upped.

Fund III – which marked the transition of Temasek Holdings-owned Vertex Holdings from sole LP to one of many – was mainly supported by family offices. Two vintages on, financial institutions are now the dominant players, part of a deliberate effort to attract more long-term capital. The LP base is Asia and Europe-centric, with only one participant headquartered in the US.

“When we started the fundraise, US LPs weren’t ready. There were more conversations at the time of closing, but we chose not to move forward with those,” said Mathias. “There appears to be more conviction that India and Southeast Asia can deliver outsize returns.”

Fund V, which his 77% larger than its predecessor, will focus on six main themes: consumer, enterprise, including software and B2B services, fintech, digital health, sustainability, and mobility. Fintech was first introduced in Fund III, while health, sustainability, and mobility were added in Fund IV. VVSEAI will continue to write early-stage cheques, typically committing USD 2m-USD 8m in Series A rounds.

Generative artificial intelligence (AI) is considered a must-have for software portfolio companies rather than a discrete investment strategy. “Just as every company became cloud-enabled, each one will introduce generative AI. The APIs [application programming interfaces] are opensource, so you can plug them in,” said Mathias. “Large language models (LLMs) are also being developed in local languages.”

VVSEAI remains an oddity in that it straddles Southeast Asia and India with teams in Singapore, Indonesia, Thailand, Vietnam, and India. The firm considers itself neither an Indian manager expanding into Southeast Asia or vice versa, prioritising having teams on the ground and drawing comfort from the geographical diversity its strategy offers. There are also common investment themes.

“In digital lending, we’ve done Kissht in India and Fairbanc in Indonesia. In online content, there is Kuku FM in India and MeTub in Vietnam,” said Mathias. “There have also been situations where we missed out on the India opportunity. We didn’t do the ‘house of brands’ concept in India but we knew it worked and we used that knowledge to back Daily Co [a multi-brand food & beverage start-up] in Indonesia.”

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• Topics
• South Asia
• Southeast Asia
• Fundraising
• Venture
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• India
• TMT
• Vertex Ventures