Chua Kee Lock: SEA valuations are trending up, but Vertex stays the course based on fundamental operating principles
At DealStreetAsia’s PE-VC summit, Chua Kee Lock, CEO of Vertex holdings, shared his thoughts on rising valuations and exit opportunities in Southeast Asia from his vantage point as one of the all-weather VCs in this part of the world.
Vertex is probably one of Southeast Asia’s most experienced all-weather VCs, having weathered both good and bad times for more than 30 years.
“Within the startup ecosystem today, there are a lot more successes and opportunities. Funds have to similarly scale proportionally in order to better capture bigger opportunities moving forward”, said Chua Kee Lock Chua, CEO of Vertex Holdings, at DealStreetAsia’s PE-VC summit. “Valuations will continue to increase as more venture capital flows into Southeast Asian startups.”
The first, and possibly the most natural reason for capital inflow into Southeast Asia is the opportunity to capture the attention of a young and tech-savvy population in this part of the world. Young and digital-savvy populations are natural users of smart apps, and they will grow in consumption power in the future. When startups can prove that their business model works with this group of consumers, VC money inevitably pour in because investors are looking to capture the growth opportunities.
The second reason for capital inflow into Southeast Asia is the fact that VC as a general category has performed better than other asset classes. In the last 10 years, VC money has been pouring into China and US, and to some extent Israel, achieving very good returns, in the range of 20–30% IRR. The Southeast Asia market looked much smaller in relative terms then. Today, it is much bigger, with more than US$17.2 billion raised by Southeast Asian Startups since the start of 2021 (Source: Deal Street Asia). The market has seen more exits like Razer, SEA, Bukalapak and Grab, and so overseas LPs are seeing opportunities to create value in the Southeast Asian market.
“VCs in Southeast Asia today are receiving a lot more inquiries from LPs, and we will continue to see this trend especially with the US China trade war looming over the next few years, because people are looking for other places to deploy capital.”
What does Vertex as an investor make of rising valuations?
Kee Lock believes that the natural result of massive liquidity coming into the Southeast Asian market is inflation. Nonetheless, valuations are not necessarily unsustainable. If an investor expects to exit at a higher valuation, then the investor should be comfortable with the higher valuations today. “Whether a valuation is acceptable, it’s always relative to exit”, said Kee Lock.
Keen observers of the Southeast Asian market are in general consensus that the past few years have been red hot. With the US government printing large amounts of money in response to the COVID-19 pandemic, that money has come into the stock markets, prices in the public markets are driven up, and thus leading to a knock-on effect on private market valuations.
While conventional wisdom may tell us that at some point, the music will stop and the market will enter a downturn, the past two years have been very unusual because the frothiness in the market has been continuing for some time, buoyed by the fact that many countries are printing money, to the tune of trillions of dollars in total.
Kee Lock believes that it is only a matter of time that the market will take a breather. As an investor in technology and innovation, Vertex is laser focused in making sure that the startup team and their technology is real, and not fluff.
“Until the market comes down, Vertex may overpay slightly but we believe that the returns will come back. The key is to invest in the right tech and right people.”
Southeast Asian investors can expect better exit opportunities
15 years ago, one could count with two fingers the number of IPOs there were in China — Sina.com and Netease. Fast forward to today, there have been so many IPOs of Chinese tech companies, both in the US and in China. Kee Lock expects that Southeast Asia will go through the same growth in terms of the number of exits. While VCs in Southeast Asia are just counting IPOs by the fingers now, at some point in the future, the IPO bell should be ringing every day. “It takes around 6–7 years to build a company and we are currently seeing many companies that are around 3–4 years old in the Southeast market, which will be a lot more mature and exploring exit opportunities in another 3–4 years”, said Kee Lock.
Given that Vertex’s portfolio companies are at different levels of development, Kee Lock believes that it is not a sound strategy to accelerate the momentum of portfolio companies now, so that they can catch the bull market. “Going to the public market is a way to raise larger sums faster. Some companies are getting close to that and we encourage them to go to raise more money. But if they are not ready, we don’t force it because the company can collapse after the IPO. We’ve seen it happen”, said Kee Lock. In the ideal case, Vertex will help the founder build the company very well and grow its strength, before eventually taking the company to IPO. But only a few would be able to scale up so fast and so well. In the absence of that scenario, if somebody offers to buy out the company at a better price via M&A, Vertex will evaluate if it can do better by waiting, versus what else its investors can do with the money. “It is very nice to have a paper mark-up, but eventually it is about real cash distribution and returns to the investors,” said Kee Lock.
On the recent regulatory clampdown in China that has seen Chinese tech giants pulling out of their US IPO plans, Kee Lock sees that this is part of the larger trend of bifurcation between the US and China, starting from trade to technology and now extending to capital. For Vertex’s own China fund, the immediate action step Vertex has taken is to avoid sectors that are not aligned to Xi’s common prosperity policy push. However, Vertex is not too worried about the exit situation in China. “Chinese tech companies still have a good range of listing options like the HKEX, the Shanghai Star Board and the Shenzhen ChiNext board”, said Kee Lock.
In the future, more Chinese companies will find it more convenient to list in Hong Kong or mainland China, and fewer of them will go to the US. In contrast, the US is still pretty much the only option for Southeast Asian tech companies looking to IPO. But there is hope that this will change.
Singapore Exchange announced in early September the new rules that enable Special Purpose Acquisition Companies (SPACs) to list on the mainboard, giving companies an alternative capital fund raising route with greater certainty on price and execution. Kee Lock welcomes this development.
“In the US, if you are not valued at US$5 billion and above, it is very difficult to IPO. In Southeast Asia, if you are around US$2.5-$3 billion in valuation and you want to raise money, the SGX approach gives you an additional avenue to raise money at a decent valuation and continue to grow. Southeast Asia VCs should support SGX’s new SPAC listing framework and can see how to leverage it to grow their portfolio companies.”
Standing out from the crowd in a competitive VC landscape
There is no shortage of capital in Southeast Asia, and VCs are dispensing checks very quickly. When asked about how Vertex differentiates and “proves its value” to entrepreneurs in such a competitive VC landscape, Kee Lock confidently pointed out that while VCs typically help the entrepreneur in business development activities, Vertex has specialised employees across its 6 funds helping all portfolio companies. Vertex also dedicates much more time and energy in helping to hire talent than the usual VC. Lastly, and perhaps most importantly, Vertex also mentors founders on how to scale and what they should focus on, and how to stay the course when things are not going well.
Vertex sits down with entrepreneurs to think through and address problems, and helps them along their growth journeys. The true yardstick of being a valuable investor is what the founders who have been backed would say about the investor.
“For Southeast Asia, when prospective portfolio companies ask us to demonstrate value, it’s very simple. I can always refer them to other founders whom Vertex has backed before, and the founders would share personal anecdotes of how Vertex has supported him (or her) immensely in their journey.”
Vertex Holdings isn’t your typical venture capital investor. In July, Vertex also announced its maiden corporate bond issue. This was the first SGD-denominated public corporate bond issued by a global venture capital holding company. By having Vertex Venture Holdings, the entity owned by Temasek, issue bonds, capital was raised at a 3.3% interest rate and pumped into the 6 Vertex funds (where Temasek-owned Vertex Holdings is an LP). The standard LP-GP structure at the fund level does not change, and Vertex Holdings is the entity raising bonds. Because each of the funds generate 20–25% IRR, it provides a good return on capital relative to cost.
The road ahead
As the CEO of the oldest VC in Southeast Asia, Kee Lock has met, evaluated, invested in and advised countless founders. He has also been through a founder’s zero to one journey himself. In terms of entrepreneurs, he is looking for people who are driven, where the CEO/Founder has a clear sense of direction and is able to mobilize people to get things done well. The CEO/Founder also needs to see the big picture and communicate well to rally the team so as to have a sense of shared purpose.
While new market developments surrounding capital inflow and exit opportunities have profound implications for both VCs and founders, Kee Lock is a strong believer in the following two unchanging operating principles:
● First, invest in a good team and real technology. This will ensure the returns. Even if a target’s valuation may be somewhat overpriced today, if the exit opportunity is commensurately big, this is still a good investment.
● Second, compare the exit opportunity or value offered against what else the LP can do with the money. SPAC and IPOs can be pursued if these options raise money at a decent valuation and allow the business to continue to grow. Otherwise, it may well make sense to cash out the returns to investors via M&A, with the right price and timing.
“Every deal that we do, we go through the same process”, said Kee Lock.
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