Despite the evident need for liquidity solutions, secondary strategies in Southeast Asia are still nascent. Many market participants lack familiarity and comfort with secondary strategies.

Southeast Asia has emerged as a hotbed for private capital investment, attracting significant attention in recent years. The region's allure stems from its collection of rapidly expanding and diversifying economies, offering a fertile ground for investment across numerous sectors. A key driver of this surge is the burgeoning technology scene, characterised by youthful ecosystems brimming with potential. This, coupled with favourable demographics, including a vast and skilled workforce poised to shape the future of Southeast Asian economies, has made venture capital a particularly attractive avenue for investors. The excitement culminated in a record-breaking year in 2022, with private capital deal values reaching an unprecedented $34.1 billion across private equity and venture capital investments.

The region offers vast opportunities but also has its fair share of challenges. Because Southeast Asia is not a single market, and government policies and regulations vary widely from country to country, much of the region’s activity is centred on Singapore. The country offers a business-friendly environment for companies and, with favourable tax incentives, pulls much of the region’s fundraising. 

2023 at a glance (Pitchbook data)

• Though the VC market is significantly more active than the PE market in Southeast Asia, VC within the region lacks growth-stage capital. Much of the activity occurs in earlier stages of the venture because of the high number of small funds raised. 

• Cash returns remain elusive for Southeast Asian investors for both PE and VC strategies. Since 2015, just $79.3 billion in exit value was generated by PE-backed companies, and just over $70 billion was generated by VC-backed exits. This value is incredibly lumpy as well. The four largest exits combined between the two strategies comprise nearly 46% of the total exit value. Grab’s reverse merger with a SPAC in 2021 was the largest SPAC acquisition ever at $32.8 billion. In 2023, just $1.1 billion in VC-backed exit value was generated, and PE-backed companies generated just $7.0 billion. 

• Indonesia’s venture market is a growing alternative to Singapore within Southeast Asia. As the region’s most populous country (nearing 300 million), Indonesia offers companies the largest growth market. Jakarta has developed a thriving tech ecosystem as well. However, one of Indonesia’s unique characteristics is its large network of conglomerates, which has driven economic growth. These large, highly diversified companies have looked to invest in startups to expand new business lines and add emerging technologies under their umbrella. 

Exits are being delayed

Maintaining the current pace of investment in Southeast Asia faces a significant hurdle: the limited number of successful exits for VC-backed companies over the past ten years. Since 2015, the total exit value generated is a mere $70.2 billion, with over $55 billion stemming from just three major exits occurring in 2021. This scarcity of exits highlights several underlying challenges.

One key issue is the lack of sufficient and viable exit pathways for regional companies. Additionally, many companies struggle to achieve the scale necessary to deliver the substantial returns that venture capitalists typically seek.

The region's stock exchanges present another set of obstacles for companies aiming to go public. Many find listing on US exchanges or Hong Kong's Hang Seng Index to be a more appealing prospect. A case in point is SHEIN, a company originally launched in China and now headquartered in Singapore. SHEIN has indicated its intention to list on the New York Stock Exchange, a move likely motivated by the potential to secure greater capital and tap into a larger, more active investor base.

Beyond pursuing capital, companies are drawn to alternative listing venues due to the stringent regulations and often protracted filing processes associated with several regional exchanges. Some exchanges, for instance, mandate profitability or near-term profitability projections. This stands in contrast to the flexibility offered by exchanges like the New York Stock Exchange, where companies like Sea and Grab successfully went public despite experiencing significant losses in the years and even billions in losses annually leading up to their IPOs.

The emergence of secondaries in Southeast Asia as a means of generating liquidity 

The confluence of internal and external pressures has created a scenario where both Limited Partners (LPs) and General Partners (GPs) may encounter liquidity challenges, necessitating the conversion of their typically illiquid holdings into cash. This need to unlock capital before a private market fund has fully exited its underlying investments is fuelling the growth of the secondary market.

LP Liquidity: LPs, for instance, may seek to liquidate their fund positions for various reasons, such as aligning with shifts in investment strategy, divesting legacy holdings, or rebalancing their overall portfolios. In the US, the recent liquidity crunch experienced by numerous institutional investors has further amplified the demand for liquidity solutions.

Regional Secondaries: Southeast Asia has witnessed a parallel trend, where the evolution of the private market, coupled with these inherent liquidity needs, has fostered the emergence of a regional secondaries market. While the current ecosystem, characterised by a limited number of active, regionally focused secondary firms and a relatively small market size, remains in its early stages, we anticipate a gradual but consistent expansion in the years to come.

Secondary Transaction Characteristics

The predominant approaches to secondaries in Southeast Asia largely mirror those observed in more established markets like the US. LP-led secondaries often involve secondary funds acquiring fund interests directly from LPs or structuring preferred equity arrangements. GP-led secondaries, on the other hand, commonly utilise continuation vehicles, aligning with global practices. However, GP-led transactions involving VC assets sometimes encounter pricing discrepancies, where secondary buyers and GPs struggle to agree on the fair market value of the assets. In such cases, special arrangements, such as preferred equity structures, can be implemented to bridge the gap, providing LPs with liquidity while offering downside protection to buyers.

Two key characteristics differentiate Southeast Asian secondaries from the global market:

• First, unlike the US and other mature markets where PE secondary transactions are more prevalent due to investor preference for the stable returns of buyout positions, Southeast Asia, similar to other emerging markets in the Asia-Pacific region, sees a greater volume of VC deals than PE. This VC-centric nature of the regional private market influences the approach of secondary funds in Southeast Asia. Some funds focus exclusively on acquiring PE assets. In contrast, others, more receptive to VC positions, including growth-stage companies, view LP interests in VC as opportunities to capitalise on potential high-growth investments, particularly those that evolve into unicorns.

• Second, even prominent market players in Southeast Asia, including sovereign wealth funds (SWFs) and government-linked investment entities like Malaysia’s Khazanah Nasional Berhad and KWAP, may experience liquidity constraints. Secondary funds often play a crucial role in facilitating these large-scale transactions by forming syndicates to coordinate and execute deals.

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