India remains the top destination for tech investors in Southeast Asia

INDIA: Southeast Asia and India continue to capture heightened attention from investors in 2018 looking to capitalize on budding technology (tech) opportunities and emerging market plays outside of China. Independent M&A intelligence service, Kroll estimated 170 tech transactions by private equity (PE) and venture capital (VC) investors worth US$2.6bn in Q1 2018.

This reflects sustained momentum from 2017, which saw the value of tech PE/VC deals in Southeast Asia and India nearly tripling over the prior year: US$18bn versus US$6.5bn in 2016.

Since 2015, India has seen the majority of total PE and VC tech activity in the Indian and Southeast Asian markets, accounting for 56% of deal value and 71% of volume. As the next biggest market, Singapore accounted for 33% of deal value and 10% of volume, while Indonesia (7% of deal value and 7% volume) was also on investors’ radar screens.

Sectorwise, e-commerce, fintech, healthcare (medtech/pharmatech), and AI stand out for their advances in applications that cross and connect diverse industry sectors.

Reshmi Khurana, Kroll’s Managing Director and Head of South Asia said, “As traditional banks continue to face pressure from nonperforming loans in India, and increasingly in Southeast Asia, technology companies seeking capital have been turning to private investors. Meanwhile, governments in these geographies have been providing fertile ground for digitization and tech investment through policy initiatives, by incubating tech funds with traditional banks or by initiating e-governance projects to digitize government services, attracting investment in ancillary industries like enterprise solutions.”

While local or regional funds have been the dominant players in these markets, foreign investors have been making inroads. US investors took part in 25% of tech investment occurrences from 2015-Q1 2018, followed by Japanese (5%) and European (4%) funds.

Challenge for PE/VC investors in new technology:

Although new tech advances come hand-in-hand with a number of risks for PE and VC investors, Khurana says, “The number one risk is regulatory risk, aside from shared market and financial risks, especially when tech crosses into highly regulated sectors like financial services, insurance, and even media.”

Anticipating regulatory reaction to new technology is a complex challenge for investors as Khurana notes, “Businesses cannot predict regulation because regulators cannot predict how businesses will evolve. To some degree, all new technology is inherently disruptive to established business models or processes. Out of necessity, this often translates into regulatory action that is more reactive than proactive as the effects and consequences of a particular technology become known over time. We often see regulators later imposing controls around licensing or pricing to protect consumers and local businesses.”

To navigate safely in an investment landscape replete with hidden risks, investors are well advised to conduct thorough investigative due diligence prior to committing to an investment.