The Great Repricing of 2022
None of us has a crystal ball, and if we would, we’d probably not be sitting here. Crystal balls belong in fairy tales, and we must deal with harsh realities. The current reality is that market conditions are volatile, and there are uncertainties about how these conditions will play out in the next few years. Founders are looking to navigate these markets while growing their business, finding acquisition targets, and potentially even thinking of listing their companies. Investors are reevaluating their current assets and are wondering if they need to double down on emerging markets or be conservative and hold on to their dry powder. A crystal ball would have helped in these times.
In the past few months, I met limited partners and institutional investors across the globe. As a venture capitalist in Southeast Asia, I was often asked how we look at the current markets and where we see risks and opportunities. We decided to host a webinar for our limited partners and founders to discuss the markets and the current outlook.
A few key takeaways.
Since the stickiness of heightened inflation and a significant amount of time getting used to the loose policy environment, the recovery period is unclear. As a result, financing in the capital market will take some time to recover, and the valuation environment is expected to take even longer.
For China, the Anti-Monopoly policy change has disrupted domestic companies but is counterbalanced by semi-conductor and support to fintech and digital infrastructure. In addition, an agreement signed between the PCAOB and CSRC may move the US listing for Chinese companies forward. The consequence is that more companies have looked for investments outside of China. One of the beneficiaries is Southeast Asia.
The market is dropping 30–40%. Capital markets in the tech sector are down close to 90%. This is a significant wipe-out in the year’s first half of public market activity. Institutional investors have moved out of high-growth areas primarily due to interest rate impact and a disconnect between valuations and the state of profitability for high-growth companies. The IPO window seems closed for the moment. Companies scheduled to list in the next 24 months must return to the private markets for fundraising. The question to be answered is at what price these companies can raise. The private markets tend to lag 3–6 months from the public markets.
The good news is that we have not seen a black swan event. There is a decent amount of liquidity in the private markets, particularly in the Asian region. The activity level focusing on SEA has never been this high, which is a silver lining to the events of the last six months. People are reflecting on what is happening in the public market, rethinking valuations, and how to structure transactions. Investors are focused on making sure there is protection when they are underwriting business plans. Looking at ASEAN transaction volumes on a Y-o-Y basis, Southeast Asia is still on a relatively better track than other regions.
The downturn is impacting Southeast Asia less due to smaller deal volumes at the growth stage, and although the deal volumes are lower than 2021, they are still far exceeding 2019. It showcases that Southeast Asia is becoming more robust.
Where do we go from here?
First, companies across the region will reduce their burn due and increase margins to an uncertain fundraising environment. Globally, tech companies across the board are reducing their headcount and marketing spending to improve margin and path profitability.
Second, downturns are challenging, and they can separate the winners from the losers. It separates companies with solid business fundamentals and the ability to switch on levers to grow profitability. Some of today’s tech leaders were founded right after the previous downturn (2008–2010). Companies that provide value to consumers grow with less capital have resilience and persistence, and can come out the other end stronger.
Third, consolidations with peers, vertical consolidation, and value chain consolidation can be good merger opportunities. However, it is difficult for the buyers and sellers to agree on valuation in a high-volatility environment.
Even in tricky market conditions, investing in Southeast Asia is more global than before. Capital out of China, Europe, the US, and the Middle East has found its way to the region. A clear opportunity for institutional capital looking to double down on the diverse and constructive emerging market.