Asean tech IPO drought likely to remain, startups may choose M&A instead

JUST a year ago, at least two dozen tech companies across South-east Asia were eyeing a public listing – offering their early investors a much-awaited opportunity to cash out. But 2022 turned out to be a disappointment, as only a handful of them made it to the finish line.

“The public markets are in a tailspin and there is no certainty when they will stabilise and where the bottom really is,” said Shauraya Bhutani, co-founder of Capital Connect Advisors.

“I think everyone is waiting to reach an equilibrium where there is some certainty around interest rates, inflation and the global geopolitical environment.”

He believes this could come in mid-2023 in an optimistic scenario, but a more conservative prediction would be early 2025.

Julien Salanave, director of the Entrepreneurship and Innovation Center at Essec Business School Asia-Pacific, also does not see much scope for unprofitable venture-backed tech companies in South-east Asia to pursue an initial public offer (IPO) in the next 18 to 24 months.

“It’s always hard to have a crystal ball, but I think this is not just a three- to six-month situation. I think there’s a longer-term bleak outlook,” he said, citing uncertain economic conditions and the poor performance of recently listed South-east Asian unicorns.

Large tech companies spent the past few years raising funds at high valuations amid an ultra-low interest rate environment. But the public markets are unlikely to stomach such high valuations, and that is stopping some companies from pushing ahead with an IPO.

“Now that the valuation multiples have completely changed on the public market, those companies, if they decided to nonetheless go public, (it) would probably be at valuations significantly lower than their last private round,” said Salanave.

“Going public on a down round is extremely difficult … (It’s) a much harder story to sell for an investment banker.”

The US market, the preferred venue of tech startups, has had a particularly significant dearth of listings.

There were only 178 IPOs in the US in 2022, an 82.8 per cent drop from the 1,053 listings in 2021.

“I think the US market (is) basically shut for listings, and there’s a question mark around when it fully opens again,” said Tushar Roy, partner at venture firm Square Peg.

Better outlook for M&As

The lack of IPOs could open up room for mid-sized mergers and acquisitions (M&A).

Bhutani sees several of these in the offing that could provide venture capitalists with decent returns.

“Another factor driving up mid-market M&A activity is the onset of the funding winter; there are some decent companies below US$50 million (in valuation) that are struggling to raise but have an attractive business in the hands of the right acquirer. M&A is a survival mechanism for them,” he said.

As the IPO market gradually recovers, Bhutani thinks the Indonesia Stock Exchange (IDX) could be a bright spot. The exchange already has a few tech IPOs in Bukalapak and GoTo under its belt.

“We see some strong tech businesses being built with solid fundamentals and unit economics that will be ripe for a public listing, subject to market conditions, in late 2023 or early 2024,” he said.

“I would watch out for the IDX to show the way for South-east Asian tech listings.”

That said, some observers also reckon tech companies would aim to list in the US rather than domestically.

This is because domestic markets in South-East Asia still lack the liquidity and depth of the US exchanges.

“(If) the timing feels better and the market sentiment is better, they’ll probably choose to still go public in the US,” said Square Peg’s Roy.

Chik Wai Chiew, chief executive officer of Heritas Capital, thinks it is unlikely that Sea or Grab would choose to list in Singapore over the US today.

He also cites the example of Nanofilm Technologies , which listed on the Singapore Exchange to great fanfare in October 2020. While its share price did go up to hit a peak of S$6.28 in July 2021, it has since fallen to S$1.43 – lower than its IPO price of S$2.59.

“There are no simple answers, it is really hard to say,” said Chik.