Welcome to the Weekly Recap by Momentum Works, where we dissect business news in China and Southeast Asia.

In this podcast episode, we invited our experts Ada and Vion, who recently attended the annual PE/VC summit. The summit gathers different investors, LPs, and some startup founders.

Listen in to gain invaluable insights and stay ahead in the dynamic world of business. Below, you can find the player to tune in and the transcript (generated by AI).

Episode transcript:

Dalia 0:01
Hello, everyone. Welcome back to the in depth episode of the Impulso Podcast. Today we’re bringing to you our guests who recently visited a very interesting event, which is a PE/VC Summit.

Jianggan 0:19
Hello, yeah, it’s Jianggan here. Last week, our friend, Joji Philip of DealStreetAsia invited us to his annual PE/VC Summit, where the investors, LPs, and some of the startup founders gathered to discuss about I mean, the investment landscape in Southeast Asia. I think my colleagues, Vion and Ada, who are here were at the event for the whole duration, I was there to speak at a panel. And of course, lots of views, exchanged lots of different panels, species about I mean, how the sentiment is and how they look at investment. As we’re crossing the third quarter of 2022. A lot of things are continuously evolving. And what’s the takeaway from this event?

Ada 1:10
I think people from very different backgrounds are seeing and sharing very different, very different views.

Vion 1:19
And there are a few common themes. Right. We’ll go into that later. But yeah, some seems to be a bit more cautious. But again, some think of it in a more positive light.

Jianggan 1:30
Are people more optimistic now compared to beginning of the year or, more pessimistic?

Ada 1:34
I’ll definitely say things slowed down quite a bit in terms of the primary investment landscape, at least in Southeast Asia. At the beginning of the year, I mean, people were not really optimistic, per se. But they were hopeful, in a way. I think now, people are more cautious. And I think a lot of GPs were like asking each other privately, right? What are you investing

Jianggan 2:00
So GP refers to a general partner? Can you explain a little bit of what they do?

Ada 2:03
They invest directly, usually, also the raise funds from limited partners, which are like the investors for investors. The people who have real money or… I mean, some office also raise people from like, upper layers of investors. Right. Okay. But then typically, people just call LPs that like the, you know, more upstream funding side. So LPs do directly investments themselves as well. They also investment funds, that’s called primary investments. And they sometimes buy stakes of funds from other funds, and that’s called secondaries. So basically, this is like the three types of common investments, LPs to the GPs, or like the usual PE/VCs, you see on use, these are professionals who put investment directly into companies in a way that they do most of the direct investments.

Jianggan 2:51
So you’re mentioning that the GPs were talking to each other about?

Ada 2:54
What are you looking at? What are some of the hot themes now? Because there seems to be a lack of any hot themes happening in the market in this region?

Jianggan 3:06
Hot things. I mean, in the past, what do you see as examples of hot themes?

Ada 3:11
I mean, I only moved back here last year, right. I think some usual themes that has been happening in Southeast Asia include FinTech, ecommerce and a little bit of SaSS, although I don’t think everyone really buys into that thesis right now. I mean, web 3 used to be big last year, but I think this year sentiment has changed.

Jianggan 3:34
Quite a bit. For what for you, although, I think if you look at the the bitcoin price is gone up quite a bit since the beginning of the year. What else was hot in Southeast Asia?

Ada 3:46
Agri Tech, I think nowadays agri tech slash climate tech really big.

Jianggan 3:52
I think it is lots of investing in health as well, because people see this as big faces. But generally, you mentioned that people are asking each other what is hot? Tell us a little bit more about how hot themes drive things? What’s the importance of hot themes in the investor community? Is that something with a formula of consensus that everyone should spend their attention? Because we know that there are lots of things out there. And it’s kind of difficult for each one to act on their own? Right?

Ada 4:22
I’m not really sure I fully agree with that. Because back in the days when I was like in Beijing, China was a very large market. Of course, there were like waves and tide, but I will say a lot of that were driven by fundamental factors. For example, when there is 4G becoming widely available, here comes mobile internet. So that’s the wave or the tide, or so called hot things. And it goes for years, because it’s like a generational change. Then, of course, as like, economy grows, and then there’s like different stages, for different sectors to grow extraordinarily fast, or out-performing compared to other sectors, and that make those sectors hot. And of course, when those sectors are growing fast, there’s naturally more capital flowing into the sector, whether it’s VC money, PE money, or from companies from government, right? Oh, of course, there’s obviously influenced by policies, but then it’s really influenced by a lot of real fundamental factor changes.

Jianggan 5:23
So basically, it’s a virtual cycle.

Ada 5:25
It is real cycle. It’s not just hype. Yeah.

Jianggan 5:28
So basically, if there’s something which changes would unlocks the new potential, and investors coming to find these people seizing the potential, and then the whole thing evolves.

Ada 5:39
Yeah, so it’s like cliche flying. Well, yes, you need a capital, you need entrepreneurs, you need the talents that support entrepreneurs, that eventually need an exit or success stories to justify it, like this sector having real fundamental growth and value.

Jianggan 5:53
Obviously, this is different from hype. And of course, there are lots of things that people talk about. So for instance, this year a lot of views talked about AI, right? How do you differentiate fundamental change from hype?

Ada 6:06
Sometimes those two go together. When something becomes popular, or people resist a potential, usually there’s like a overheat. But there are companies that change, that’s normal. But then what I would say like how I differentiate the two is to look at the fundamental numbers, for example, like tons of startups flourish in this space, what’s their numbers? How are they doing? Essentially after one year are they generating more revenue?

Jianggan 6:33
For startups, if you give them the resources, if you give them the funding? And over a period of time, are they able to make a difference?

Ada 6:40
(You mean) Are they really delivering anything real in that space, or is that real? So for example, like in the most common and easy-to-tell terms, are there real transactions or are there real contracts that translates to revenue at least? Sometimes you have profits, sometimes you’ll do not, but then that evolves. So we don’t really judge by profit, but at least you have top lines.

Jianggan 7:06
So coming back to what we’re facing now, and people are asking each other that is there any hot topics that you’re pursuing? Does that mean people do not know what they should be pursuing?

Ada 7:16
I mean, the sentiment or the ways of thinking, from my observation could be a little bit different across regions, because I mean, a lot of the investors in the region would agree that Southeast Asia is still relatively young. In terms of the VC/PE investment ecosystem system. A lot of people say the quote hasn’t gone through cycles yet.

Jianggan 7:40
We’ve been saying that since like 2015, saying that Southeast Asia has not gone through a cycle.

Ada 7:46
Personally, I don’t really know exactly what they were trying to say. We didn’t really go into, like definitions and all that. But then I think, from my personal view, it goes down to fundamentally. Are the economy’s growing fast enough, or supporting the level of tech innovation iteration fast enough? If it’s not, if there is no, like, big generational tech technology, or fundamental change, of course, is more leaning towards the hype, like this few months, there’s more like traction or voice from the sector. So you know, more people are drawn to that. And they look into that, then maybe after a while to decide that we’ve seen the limited number of companies in this space, they’re onto something else, but that’s very different from generational changes of themes and economy.

Jianggan 8:36
So whenever there’s a hype going on, what we do here for most investors is that it’s very difficult to stay away from it.

Ada 8:45
There’s always the pressure of not missing out, right? I mean, for good companies, whenever you’re looking at them, you think there will be relatively more expensive. It’s natural, and it’s fine. So with that in mind, of course, a pressure to deploy and really good entrepreneurs, people of course try to look at everything, this coverage, that’s your job. So there’s nothing wrong with that. But sometimes there’s the pressure to act. For example, if a very well known VC who runs a very generous check at a very good valuation, it’s up to the other people to decide: do they buy in the same thesis or do they buy in the evaluation.

Jianggan 9:24
If they don’t, obviously there’ll be pressure, right? Whether the judgment will eventually proven to be right or wrong.

Ada 9:29
I mean, there’s always periods of noise and periods of disagreements. Some people believe this can’t be right. I don’t know why people are doing this, but this can’t be right. But then there are other people who think they see the actual reasons to be optimistic. So they actually think those are okay or reasonable. But then who’s right? It takes time and also need to dig a lot deeper to ask them why you think this way.

Jianggan 9:58
To which extent do you think that is true? Because people have different information, or is that people look at very similar information, but come to very different judgments.

Ada 10:07
I think both happened, because first of all, investor’s mandates are different, and priority is also different. That leads to different decision mechanisms. Of course, the level of due diligence or the people you talk to, or how you come to a decision-making judgment, the process is very different. Apparently will lead to very divergent views.

Jianggan 10:29
You guys have been to both PE part of the conference, VC part of the conference and LP part of the conference. Do you see a difference in the sentiments of different groups of people or the topics that are concerned with that they’re talking about?

Vion 10:43
I mean, the VC, the VC session, probably focused a bit more on the Southeast Asia perspective. So of course, we’re hearing some optimisms or hope in the region. Everyone is saying now that there is some reduce capital inflow into China. So it could be Southeast Asia or India for the place to go next, but based on the sentiment, towards the two days, looks like not quite there yet.

Ada 10:51
So I heard a few common themes from LPs. The first is this region is to show access, like GPs need to drive up their DPI numbers, which essentially means what’s the amount of money or portion of money you return to investors.

Jianggan 11:31
So basically it’s the ratio of how much the investor be given back when they invest $100.

Ada 11:37
Yes. So the give back is not based on the book, the valuation markup. Instead it’s like real cash return or equity return, distributed back to investors, to the LPs. So basically, the number in this region has remained very, very, very low. I think a lot of the global LPs were commenting that if you benchmark the numbers in terms of both return and DPI, the sad truth is Southeast Asia is just not there, compared to all the other major bigger markets.

Jianggan 12:07
Interesting. So which means that LPs are talking about this topic?

Ada 12:11
Yeah, I got requests from LPs that asked us to maybe track a little bit of market access in this region, that would really help make the market you know, healthier, or just reexamine the realities, and also adjust expectations from that. Because from LPs perspective, they need to see money coming back in order to pump in new capital to support the growth of this region. But then if they see money stuck in this region, and already delivering value, they will think, again, on where to put money next.

Jianggan 12:45
So the practical implication, if they don’t see money coming back, is that they will stop allocating.

Ada 12:51
I don’t think they will stop allocating to Southeast Asia.

Jianggan 12:54
Because of the mandate?

Ada 12:56
I mean, for LPs’ perspective, especially the global large ones, they think of it as like a regional thematic allocation.

Jianggan 13:04
So they will have a certain percentage allocated to the theme like Southeast Asia

Ada 13:10
Yes, emerging markets, for example. But of course, you can twist the proportion. So for example, there were some capital outflows from China. I try to think the more accurate discussion is global LPs has not been selling off their China portfolios. I mean, these are just words quoted from some global LPs. So it might not be representative.

Jianggan 13:33
It’s not based on our research, right? It’s just quotes heard on the street.

Ada 13:38
For China, I mean, their allocation exposure will not be more than 10% for large global LPs currently. So it doesn’t really make sense for them to just sell them off for a variety of reasons. So first of all, although there’s a lot of tension decoupling happening, but China still have one of the most digitally developed ends and also large markets in the world. And you simply do not really have any close replacements to that. And that’s why in terms of like new capital allocation, some LPs reduce their allocation to China. But then they actually put some money to developed markets in Asia, for example, Japan, Korea, not just emerging markets.

Jianggan 14:25
That’s actually interesting, because we see lots of buzzes about people talking about Japan over the last few weeks. And that is something that we hadn’t seen for a long time that people talking a lot about western tag, the opportunities, the entrepreneurship in Japan, which has, I mean, again, it’s not scientifically sort of research on but I do hear lots of like perspectives on Japan over the last few weeks.

Ada 14:47
Yeah, I think always a relative decision. If you can find somewhere to deploy money, you deploy them. If you simply cannot, you save them. You reduced your allocation into underlying assets if that’s what LPs are doing.

Jianggan 15:01
What would be the practical implications on GPs in this region?

Ada 15:05
I think when we talked to global and regional LPs, they were complaining it’s a bit crowded in the space.

Jianggan 15:12
Is it because there’s too many GPs?

Ada 15:13
I think essentially capitals. In terms of GPs, it’s kind of hard for new GPs to raise capital and new fund, unless they have some underlying substance or pipeline. It’s a proof to the LP like how we are really different. It really depends on underlying assets, and what kind of capital it can actually take in and produce good returns. So it doesn’t really sink in due to limitations to this region is actually fragmented and comprised of different countries, and they have all very different realities. So the efficiency of capital trickling and producing an effect will naturally be slower compared to large homogeneous markets. And then that depends on in a certain period of time, how much capital should be allocated in this region to produce reasonable return.

Jianggan 16:04
So you mean, that, of course, GPs would need to sound optimistic. And LPs are, I mean, even the way they talk, they’re quite lucid.

Ada 16:14
Yeah, I would say so. But that’s also understandable.

Jianggan 16:18
I do think GPs are lucid as well. I mean, they are clearly aware of what are constraints, what are limitations, what are the challenges of this region. But of course, in public, they obviously need to be a little bit more optimistic than the actual assessment.

Ada 16:33
Yeah, I mean, they wear different hats, so of course they speak from different views and perspectives. So I would say that’s just very normal.

Jianggan 16:42
Do you see the difference between the PE investors and VC investors in terms of their assessment, based on the discussions you had?

Ada 16:49
Yeah, I actually think there’s more interest in terms of buyouts, or like larger stake PE investments. Because I think from the perspectives of investors, especially outside of this region, they’ll see Southeast Asia as a good place in terms of like, you know, more heavier assets, manufacturing, or consumer, or even agricultural assets. So I mean, that’s where PE capital coming in traditionally.

Jianggan 17:16
Did you lots of assets in the region, which could become more effective or could be more efficient? And if you just do the turnaround, they can generate good returns in a way?

Ada 17:25
You can still achieve solid, steady growth in this region, whether it’s through like a newer generation services, for example, hospital services, healthcare services, maybe there’s like branches, all this is chained. But there’s definitely growth potential as this region’s customers are getting definitely more sophisticated. Their disposable income is slowly growing, right? Of course, there’s trends for upgrades. But then if you’re only betting on the lighter models, they’re looking at very different sectors and fundamental realities.

Jianggan 17:56
What do you mean of lighter models?

Ada 17:57
Assets like higher gross margin, very little real, tangible assets, basically, mostly tech marketing brands that doesn’t really have supply chain in house.

Jianggan 18:08
So these are the models, which are a bit difficult, but these are the models that VCs invest in, right?

Ada 18:14
That’s why I think they talked to on some of the lawyers in this region, right? They help on the right, like the MRA and all that. I asked them “how are you doing”, they are like “yeah, very nice!”. A lot of pieces are actually just, you know, quietly buying mixed assets. Because your expectation for them for the return is more reasonable, right? You expect slower growth, you care about the margins and cash flow instead of looking for big wings.

Jianggan 18:44
basically that’s the bet which which you’re more certain about, right? You know where exactly you can get,

Ada 18:50
Because essentially, a lot of the product market fit is proven. From the physical branches, you’ll know who your customers are. If you have a physical branch, you’ll know your radius or parameter of service. And then a lot of logic is driven by optimizing internal operation per branch. And that will open more stores in several addressable markets. So that’s a clearer model.

Jianggan 19:12
It’s clear and, and operationally, you know exactly what needs to be done. You’re not looking for product market fit in a way?

Ada 19:19
Yeah. Because the issues you deal with are more specific.

Jianggan 19:25
Since we touched upon a little bit about China and the allocation, so of course in headlines you see lots of people saying that okay, this specific asset manager stop investing in China or this pulling out of China, etc. How do you make up of all this noise and, of course, the narrative starts I mean, some of the people are talking about: is China becoming uninvestable?

Ada 19:45
That’s a very absolute statement Ray. Of course, I’m hearing LPs are themselves LPs, they have conviction to invest in China. Some of them are in the position to gather the right resources and people to invest. Even you were hearing some LPs trying to put together some RMB denominated funds, working closer with local governments and also invest more towards like the industries that Chinese government is promoting right now, it will make semiconductor renewable energy and a lot of other things. So I mean, if you want to do this, if you know how to do this, you probably still want to benefit from it. Because a lot of global LPs have made money, real money and returns from China that they haven’t seen elsewhere in the world.

Jianggan 20:29
So basically, there’s two things, there’s nothing which will prove them otherwise, unless you believe in the narratives, which is spreading the headlines, and assessments that people have made real money.

Ada 20:40
Yeah, I mean, are they gonna make continue to make real money? No one knows. Right? But then what are your options, they will decide what you can do with it.

Jianggan 20:49
Interesting. Let’s wrap it off. So for both of you, during the two days, what was the most interesting anecdote that you have heard? What was most interesting comment that you have heard from the participants, from people I spoke to?

Ada 21:04
I’ve seen, like people complaining to me, I do not like this kind of networking session. It’s like, they’re talking to me, but they’re looking elsewhere. Like, I know, they’re not interested. But then we’re still talking

Jianggan 21:15
Sounds sad.

Ada 21:17
I mean, he did a whole thing about it, right? I mean, it’s natural for people to try to just, you know, get to know each other. I quickly decided, why don’t you go, you want to talk a bit more or to do just want to meet more people? Because essentially, this is for people to meet up.

Jianggan 21:32
What’s your lie If you want to wrap up the discussion and move somewhere else?

Ada 21:37
Just say thank you. Appreciate their time. Nice to meet you. You’re on to something else.

Jianggan 21:43
You anything interesting?

Vion 21:46
When do you want to China? Maybe the approach would be a lot of people are saying the approach would be to stay invested. And of course, a lot about the fragmentation in Southeast Asia. We covered a lot about that already.

Jianggan 22:03
I think that’s the end.

Dalia 22:05
Okay, thank you so much Ada and Vion for sharing some insights about the summit some very valuable information for people who didn’t have a chance to visit one, like me, for example. Okay, and for the rest of you have a nice time. I hope you enjoy this week’s episode. And see you next week for weekly recap. Bye. Bye. Bye bye.


Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].