SINGAPORE - South-east Asia's booming venture capital and private equity investment market is set to see deal value soar to US$70 billion (S$96 billion) over the next five years, double the level of the previous five years, according to a Bain & Company report released on Monday (Nov 19).
The report also predicts that the region will produce at least 10 new unicorns - new companies that rapidly achieve market valuations of US$1 billion or more - by 2024.
Scores of new investors have been pouring into the region, with South-east Asia-dedicated funds' dry powder more than double since 2012, attracted by the region's strong macroeconomic fundamentals, the chance to invest in emerging regional champions and a deepening secondary market for deals of all sizes. The mix includes a combination of local venture capital funds and private equity funds, sovereign wealth funds and global funds.
Start-ups maturing, strong exit momentum and healthy returns have also been catalysts for investment activity.
Technology companies have attracted the bulk of new capital, rising to 40 per cent of deal count in 2017 from 20 per cent in 2014. Since 2012, 10 unicorns including Grab, Go-Jek and Traveloka have created a combined market value of US$34 billion, ranking South-east Asia No. 3 in the Asia-Pacific region, behind only China and India.
Strong investor interest in the region's developing technology sector and other consumption-based industries is likely to help sustain higher levels of investment. Bain & Company senior adviser Suvir Varma and principal Alex Boulton, authors of the report, expect the technology sector to contribute 20 to 40 per cent of deal value over the next five years, particularly the financial technology sector.
They added that investor interest in healthcare and education, "sectors with significant long-term growth potential, but traditionally fragmented", will also redouble.
Across the region, fast growing start-up ecosystems may also knock Singapore off its perch as South-east Asia's investment hub. Another Bain & Company survey showed nearly 90 per cent of investors said the hottest South-east Asian market outside of Singapore in 2018-19 will be Indonesia and Vietnam. The number of companies in Indonesia raising a first round of funding in 2017 rose more than 300 per cent from 2012. Together, Indonesia and Vietnam generated 20 per cent of the region's private equity deal value over the past five years, and that percentage is likely to grow, said Bain.
For now, "investing in South-east Asia is taking off, but new challenges - notably intensifying competition and rising valuations, which are at their highest level in a decade - will require investors to tread carefully", said Mr Boulton.
Therefore, "skilled investors must raise their game to continue producing strong returns in what is still an evolving market", concluded Mr Varma.
The Bain report also noted that government initiatives have played an important role supporting venture capital and vibrant start-up centers. Singapore's Startup SG Founder programme, for example, provides $3 in matching funds, up to $30,000, for every dollar that new entrepreneurs raise. Companies seeking to raise a second round of $2 million to $4 million receive $1 in matching funds for every dollar they raise.
In October 2017, the Monetary Authority of Singapore further simplified the authorisation process for venture capital managers to help support start-up and growth-stage businesses. These moves and others have helped boost the percentage of Singapore-based start-ups that receive follow-on funding to the same level as start-ups in Europe, Bain said.
Governments throughout South-east Asia are pursuing similar policies. In 2016, the government of Vietnam announced it would offer legal and financial support to 2,600 start-ups over the next 10 years through its accelerator, Vietnam Silicon Valley.
