The recent lending rate hikes coupled with inflation across the globe have spooked investors and banks into spending more cautiously. A recent report from HSBC and KPMG indicated that venture investments in Asia this year are unlikely to surpass the US$193.7 billion record-high in 2021, signaling a slowing rate of investments.
To find out more about this increasingly popular form of investment in the region, we spoke to Paul Ong, who is a partner at InnoVen Capital. This company is one of Asia’s leading venture debt and lending platform providing debt capital to high growth ventures primarily backed by venture capital firms.
The entity is a joint venture between Temasek Holdings and United Overseas Bank Group. Currently, the platform is active across India, China and South East Asia while continuing to expand to other high growth economies in the region.
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As a Partner of InnoVen Capital Southeast Asia, Paul brings more than a decade of experience in corporate debt origination and structuring in Southeast Asia. Paul joined InnoVen Capital to kickstart the Southeast Asian business in 2016, and has gone on to lead more than 30 venture debt investments across the region to companies such as Ruangguru, Tiki, Akulaku and eFishery.
In his previous role with DBS, he had executed over US$700 million in debt facilities to corporates and
conglomerates across the industries of healthcare, consumer, retail, automotive, real estate, and technology.
Can you describe how the venture debt structure works in Southeast Asia? How does it differ from traditional equity funding?
Venture debt is a type of loan financing that is provided to companies that are backed by Venture Capital or other institutional investors.
Venture loans are typically short tenor (1-3 years) debt instruments that are paid back over the life of the instrument. Venture debt transactions are usually structured in relation to the company’s cash balances or fundraising round size (if debt is to be provided together with a fundraise).
Venture debt is typically a less dilutive and cheaper source of capital than raising equity funding, and is a good option for startups who are looking for additional capital for growth or to extend their cash runway, yet do not quality for traditional commercial loans as they typically lack tangible assets or have historical net profits.
From an investment standpoint, Venture Debt funds recoup its initial investment and is able to make a regular fixed income return within the contracted transaction tenor (typically 1 to 3 years) with a company, whereas Venture Capital aim to make its return by selling the equity they own in a company during an exit opportunity (e.g an IPO or an acquisition), the timeframe of which cannot be easily predicted.
What has contributed to the rise in venture debt over the recent years in the region?
Venture debt has been a useful tool for many founders and entrepreneurs to grow their businesses as well as their personal wealth in more mature technology markets such as the United States.
As the Southeast Asian technology ecosystem has grown substantially in the past 6 years and more venture capital investment has been poured into the region, venture debt as an option for financing has also naturally grown in tandem. The appeal of venture debt had also been accelerated by market conditions in recent years, such as the pandemic and the current macro environment which has led to a slower pace of equity investments.
What has also contributed to the rising prominence of venture debt is the launch of government initiatives such as SPRING Singapore’s S$500m pilot venture debt program that offers high-growth enterprises a new financing option to support their expansion plans. We have also seen this in other markets in the region, such as the Malaysian Ministry of Finance’s subsidiary Malaysia Debt Ventures pilot fund of RM500k allocated to reach underserved businesses in the Malaysian startup ecosystem.
Ultimately, the region remains an attractive investment location. With the rising venture capital activity over the past decade, we will only continue to see an upward momentum for venture debt.
As pioneers of venture debt services in Southeast Asia, it is heartening to see other major stakeholders in the larger ecosystem recognise the need to support startup growth and innovation in the region by addressing the gap between traditional bank loans and equity investments.
Could you share some insight into how investments are going to evolve over the next 12 months as we enter an economic slowdown?
The rising interest rate environment has led to a valuation shock in the financial markets, which in turn has made private market investors more cautious about the valuation levels that they are currently investing at. We believe that the pace of investments has started to slow down, largely due to investors displaying a more risk-adverse behavior as well as being wary of not overpaying. A lot of companies who have sufficient capital on hand are also postponing raising funds given the market conditions.
Yet, there are many companies out there who still need to raise money for runway extension, and some companies in market leadership positions may seek to build a war-chest of capital to capture any business opportunities that may arise in the current climate. We have observed that there has been a lot of capital that has been raised for Southeast Asian investments that have not been deployed. Hence, although the region is not immune to the global macro-economic situation, we believe that investment activity will still continue, possibly more in the form of convertible note and debt structures.
Do you see any interesting industries or sectors that you believe have the potential for growth in Southeast Asia?
Asia Pacific still remains a strong region of focus for investors and Southeast Asia has a significant investment opportunity given its increased technology adoption and a broad spectrum of activity.
According to research from Google, Temasek Holdings Pte and Bain & Co., the booming internet economy is forecasted to reach $353 billion by 2025, well-surpassing the previous projection of $300 billion. Spurred by the pandemic, digital consumerism has accelerated in the region, seeing some 60 million new digital consumers from countries like Thailand and Philippines contributing to rising online spending. Leading sectors such as e-commerce, travel, media, transport and food are driving digital growth in the region. Therefore, we see great potential in investing in industries such as e-commerce, fintech, and tech-enabled consumer, automotive and logistic plays across Southeast Asia.
What’s next for InnoVen Capital?
The next decade will see a major acceleration in innovation as entrepreneurs continue to identify and roll out new ways to improve systems, companies and ways of life. Ultimately, we have observed that Asian companies can and are leading as they continue to innovate and scale globally. We are still seeing tremendous growth in the areas we are committed to and will continue to identify and support the region’s growth.