Private funding in South-east Asia’s economy approaching 6-year low; exits tough

INVESTORS in South-east Asia’s digital economy say fundraising and exits have become increasingly difficult as higher interest rates raise the cost of capital.

In a survey conducted by Bain, 87 per cent of respondents said fundraising has become more challenging; and 88 per cent said they are facing a more difficult exit environment.

The survey was published as part of the e-Conomy SEA 2023 report by Google, Temasek and Bain, which also flagged challenges faced by venture capital and growth funds in returning capital to investors.

Funds in South-east Asia have returned less capital than those in other regions. Funds started in 2016 to 2018 have returned a median 4 per cent of invested capital, versus 40 per cent in the United States, 20 per cent in Europe, 10 per cent in India and 50 per cent in China.

Funds started in 2013 to 2015 have returned a median 40 per cent of invested capital, compared with 100 per cent in the US, 70 per cent in Europe, 130 per cent in India and 60 per cent in China.

Public market exits in South-east Asia have been concentrated in a few flagship listings, primarily on US exchanges, said Fock Wai Hoong, Temasek’s South-east Asia head. “Local exchanges across South-east Asia have been less conducive, given lower liquidity levels and generally stricter guidelines of profitability.”

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Meanwhile, private funding for South-east Asia’s digital economy-related sectors fell to US$4 billion across 564 deals in the first half of 2023. This is down from US$13 billion across 1,233 deals in H1 2022.

Unless funding picks up, the region could be looking at a six-year low. Private funding came to US$9 billion in 2017 and US$5 billion in 2016.

Funding fell across all funding stages, with the biggest decline recorded for late-stage deal flow – Series D and beyond. Late-stage deal flow fell 77 per cent to US$0.4 billion across four deals in H1 2023, from US$1.7 billion across 18 deals in H1 2022.

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Growth-stage deal flow fell 76 per cent negative to US$1.1 billion across 51 deals in H1 2023, from US$4.5 billion across 100 deals in H1 2022.

Early-stage funding fell 68 per cent to US$1.2 billion across 358 deals in H1 2023, from US$3.6 billion across 914 deals in H1 2022.

Dry powder rose to a six-year high of US$15.7 billion at end-2022 from US$12.4 billion at end-2021.

Deep tech, healthtech and edtech attracted a larger proportion of private funding – a sign that investors are diversifying their portfolio from what have been the more conventional digital economy sectors of travel, digital media and e-commerce.

These nascent sectors made up 56 per cent of funding in H1 2023, up from 41 per cent in the same period a year earlier.

In this tough environment, entrepreneurs and investors in South-east Asia may have to adjust their expectations for entry and exit valuations. Business owners will also need to put more effort towards monetisation and profitability.