Sustainability Wins As Investors in Southeast Asia Shift Focus
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Sustainability Wins as Investors in Southeast Asia Shift Focus More than 50% of private equity deals now back business models that contribute to environmental and social progress. By Suvir Varma and Alex Boulton Suvir Varma is a senior advisor, and Alex Boulton is a principal, with Bain & Company’s Global Private Equity practice. They are based in Singapore. Copyright © 2019 Bain & Company, Inc. All rights reserved. Sustainability Wins as Investors in Southeast Asia Shift Focus At a Glance Sustainability investments rose 60% to $3.2 billion in the first half of 2019 over the same period a year earlier. Total private equity deal value in 2018 topped $10 billion for the second year in a row, rising sharply in Vietnam and Indonesia. Four young companies in the region have surpassed $1 billion in value since January 2018, bringing the total number of unicorns to 14. Despite warnings of a looming recession, a two-year surge of investment in Southeast Asia shows no sign of slowing. Venture capital firms in the region raised more than US$500 million in the first half of 2019, and private equity investors remain on a path to double the cumulative investment since 2017 compared with the previous five years. Southeast Asia’s fast-growing start-ups are a powerful draw for investors. In the past year, the region gave rise to four additional unicorns—new companies that rapidly achieve market valuations of $1 billion or more—bringing the total in the region to 14 (see Figure 1). Coming up fast behind them, the top five start-ups ranked by cumulative funds have garnered more than $1 billion in financing. The rapid step-change in private equity and venture investment across Southeast Asia coincides with a significant increase in sustainability investing—capital flowing to companies that contribute to environmental and social progress (as defined below). Ten years ago, for example, most large investors in Southeast Asia targeted investments in primary industries such as oil and gas, mining and agri- cultural commodities. Today many are funding innovative business models that address environmental and social needs. Examples include companies developing renewable energy projects, platforms that provide microbusinesses with access to financing and markets, and for-profit hospital networks that offer underserved populations better access to healthcare. In developing countries, the range of potential sustainability investments is arguably broader than in developed countries. Based on a definition adapted to developing countries, sustainability investing in Southeast Asia has rapidly gone mainstream. Of all private equity deals in the first half of 2019, 56% involved companies that met our sustainability criteria for developing countries, up from 30% in 2017. The total deal value of sustainability investments for the first half of 2019 was $3.2 billion, up 60% over the first half of 2018, and is on track to surpass 2018(see Figure 2). 1 Sustainability Wins as Investors in Southeast Asia Shift Focus Figure 1: Southeast Asia has given rise to 14 unicorns with a combined market value of $57 billion Valuations of SEA’s unicorns (US$ billions) Vertical focus as of Sep 2018 as of Sep 2019 Grab 14 Ride sharing, payments, O2O Gojek 9–10 Ride sharing, payments, O2O Gaming, payments, SEA 7–8 e-commerce Tokopedia 7 Country E-commerce Traveloka 4 Singapore Online travel (O2O) Lazada 3 Indonesia E-commerce Vietnam Bukalapak 2–3 E-commerce Philippines Razer 2–3 Gaming hardware Bigo Tech* 2 Streaming, social media VNG 1–2 Gaming, social media 4 unicorns Trax 1–2 have been Image recognition Revolution Precrafted 1 created since Real estate Sep 2018 ONE Championship 1 Media, sports Zilingo 1 E-commerce 0246 8101214 *Acquired by YY Notes: Valuation based on latest financing round or latest estimates that are publicly announced; market cap for publicly listed firms are as of September 2019 Sources: TechCrunch; CB Insights; Yahoo Finance; Bain analysis; Preqin Figure 2: Sustainability investing goes mainstream—56% of 2019 deals contribute to environmental or social progress Private equity deal value from sustainability Deals that contribute to environmental investing (US$ billions) and social progress 100%100% 6.2 80 6 5.6 5.15.4 60 4 3.2 2.9 40 8 2.2 2 1.61.5 20 1.1 20 0.80.9 0.8 0.7 0.3 0.40.4 0.10.1 0 0 2010 11 12 13 14 15 16 17 18 H1 2019 2010 11 12 13 14 15 16 17 18 H1 2019 Notes: Totals include companies that have a positive impact on the environment, increase access to resources and basic services such as education and healthcare, and support small and midsize enterprises; deals with values greater than or equal to US$10 million; excludes real estate and infrastructure Source: Asia Venture Capital Journal 2 Sustainability Wins as Investors in Southeast Asia Shift Focus Strong investment momentum Private equity deal value in Southeast Asia totaled $13 billion in 2018, the second year in a row that it topped $10 billion (see Figure 3). Investor interest in Vietnam and Indonesia soared, with these two countries representing 50% of total deal value, up from 11% in 2017. Technology and Internet companies dominated the investment landscape in 2018, constituting 63% of total deals, up from 37% in 2017. Healthcare and financial services also generated strong deal flow. A steady flow of capital to seed and early-stage companies broadened and deepened Southeast Asia’s venture capital ecosystem. In 2018, for the fourth year running, 300 start-ups or more received first-round funding, bringing the investable base of start-ups in the region to nearly 1,800 since 2011 (see Figure 4). The top 20 start-ups ranked by funding (not including unicorns) raised more than $1.5 billion from investors between 2018 and mid-2019, another signal of the region’s strong investment momentum (see Figure 5). Between September 2018 and September 2019, four start-ups passed the $1 billion valuation mark to become the latest unicorns, including Bigo Tech (streaming and social media), Trax (image-recognition), Figure 3: Southeast Asia private equity deal value exceeded $10 billion again in 2018 SEA investment deal value by size (US$ billions) SEA investment deal count 15 15 100 13 80 Range bound between US$6 billion–$9 billion per year since 10 global financial crisis in 2008 9 60 8 8 7 6 6 6 6 40 5 20 0 0 2009 10 11 12 13 14 15 16 17 18 Number of deals in SEA Total deal size Notes: Includes deals with values greater than or equal to US$10 million; excludes real estate and infrastructure Sources: Asia Venture Capital Journal; Bain analysis 3 Sustainability Wins as Investors in Southeast Asia Shift Focus Figure 4: Southeast Asia continues to create more than 300 start-ups a year that receive first- round funding Number of SEA start-ups receiving Cumulative start-ups since 2011 first round of funding 342 2,000 331 300 302 6 1,500 195 4 1,000 143 8 2 91 500 55 0 0 2011 12 13 14 15 16 17 18 2011 12 13 14 15 16 17 18 Note: First round of funding includes Series A funding for companies that did not raise seed funding Sources: Crunchbase as of September 29, 2019; Tech in Asia Figure 5: Beyond the unicorns, the 20 largest start-ups by cumulative fund-raising raised over $1.5 billion from 2018 to mid-2019 Cumulative funding (US$ billions) aCommerce 0.10 Carro 0.11 Ninja Van 0.12 Carousell 0.13 Tessa Therapeutics 0.13 RedDoorz 0.13 Momo 0.13 Near 0.13 Sunseap 0.14 “Next 20” I-Pulse 0.14 by cumulative Aslan Pharma 0.14 fund-raising PropertyGuru 0.14 Kacific 0.15 MyRepublic 0.16 Deskera 0.16 GreyOrange 0.17 Akulaku 0.22 Zalora Group 0.24 TauRx 0.26 iflix 0.30 Pre–2017 2017 2018 and H1 2019 Note: Cumulative data from 2009 to H1 2019 Sources: Crunchbase as of September 29, 2019; Tech in Asia 4 Sustainability Wins as Investors in Southeast Asia Shift Focus ONE Championship (media and sports) and Zilingo (e-commerce). Southeast Asia’s unicorns now have reached a combined market value of about $60 billion. Sustainability investing takes off Socially responsible investing is on the rise globally, fueled by public concern about global challenges such as climate change, pollution, deforestation and social inequality. Consumers and shareholders are increasingly demanding that companies expose ethical issues linked to their investments. That concern sparked the first wave of sustainability investing a decade or more ago as funds sought to mitigate financial and reputational risks. Now, investors are realizing it may cost them more to ignore environmental and social criteria in their investments, and limited partners are putting pressure on global fund managers to incorporate environ- mental, social and governance (ESG) criteria into their investment processes (see Figure 6). As a result, a growing number of funds are building portfolios of companies that meet Principles for Responsible Investment (PRI), supported by the United Nations—and developing the in-house capabilities to help them grow. Figure 6: General partners in Southeast Asia feel pressure to pay attention to sustainability issues when investing What's behind the shift to deals with greater environmental and social focus? (percentage) 68 60 56 28 4 Pressure from Reduces Consistent with the Better financial results Less volatile returns limited partners reputational risk firm’s values Sources: Bain Asia-Pacific Private Equity Survey, 2019 (n=144); Bain Asia-Pacific Private Equity Survey, 2018 (n=136) 5 Sustainability Wins as Investors in Southeast Asia Shift Focus For this report, we defined a sustainable investment as one that fuels growth (as opposed to a mere change in financial ownership) and meets at least one of three criteria: Improves the environment.