South-east Asia tech valuations 'to hold amid global drop'

GLOBAL tech valuations are coming down, but valuations in South-east Asia will still hold up for the next couple of years, says global valuation and advisory firm Duff & Phelps.

Valuations are starting to fall in China and India, but South-east Asia will have another two or three years before markdowns and down rounds set in, because the region is about a decade behind other countries in terms of tech penetration, said Srividya Gopalakrishnan, the firm's Singapore-based managing director in an outlook briefing on Tuesday.

"Globally in the tech space, we are seeing a lot of markdowns and down rounds in the new economy. The tech sector has kept growing, so now everybody is asking how long we can invest money in companies which are not profitable and which don't have a sense of when they want to become profitable."

Markdowns happen when investors revise downwards the value of their shareholdings in companies; down rounds occur in private financing, when investors buy stock from a company at a lower value than in the previous round of funding.

Ms Gopalakrishnan said that, for now, South-east Asia tech remains in the growth phase, with valuations continuing to rise. The sector will continue to fuel fundraising activity in the region next year.

Duff & Phelps noted that private equity and venture-capital investment into South-east Asia's tech sector jumped from US$672 million in 2015 to US$6.5 billion this year.

But more companies in the region could be restructured as economic conditions mar next year's outlook, Ms Gopalakrishnan said. "We do see restructuring happening among companies with big debts in their books, and we have seen that among a lot of our clients."

(The restructuring woes of corporates such as Noble Group and Hyflux in Singapore throw the spotlight on this trend.)

Ms Gopalakrishnan noted that restructuring companies are switching from one form of debt instrument to another, or making changes to the way the package is restructured. More of this will happen next year.

In Singapore, brighter spots remain in outbound mergers and acquisitions (M&As), which contributed about 82 per cent of the US$99 billion M&A value this year, said Duff & Phelps. Much of the deal activity is driven by sovereign wealth funds acting in consortiums; one example is the consortium comprising GIC, Temasek Holdings and others, coming together to acquire Ant Financial Services for US$14 billion.

Ms Gopalakrishnan expects sectors such as banking, financial services and insurance (BFSI), real estate and healthcare to continuing driving Singapore's M&A overall. These sectors were among the top five contributors to M&A volume and values this year. Sovereign wealth funds, in particular, are buying more real estate overseas.

"This year, it was more residential and office buildings; student accommodations have been very popular in the last few years. All that will keep increasing. Whenever there's a growth opportunity and the values go down - that's what those investors are looking for," she said.