The drop-off in growth stage funding in Southeast Asia means Asia Partners faces reduced competition for deals, but the firm will deploy its USD 474m second fund with care

In January 2022, prior to launching its second fund, Asia Partners published a coffee table-style book outlining their investment thesis for growth-stage technology in Southeast Asia. A timeline spread across page 52 ends with an empty panel containing the words: the great crash of 2022-2024.

“We started saying this in late 2021. There was a period of egregious overvaluation globally in the second half of 2021 and the first half of 2022, and it informed how we thought about the market,” explained Nick Nash, a managing partner and one of six founders of Asia Partners.

“A mutual fund must be fully invested; it can’t have more than a certain amount in cash. We can draw capital when opportunities arise, so we’ve been incredibly patient, making one investment in the last 24 months. And we are thrilled by that decision. We hope to make three or four this year.”

The firm’s period of self-imposed inactivity on new investments ran from the summer of 2021 to the summer of 2022. It ended with the lead role in a USD 80m round for Shopback, a Singapore-based e-commerce and retail rewards platform. The deal came a couple of months after Asia Partners reached a first close of USD 350m on Fund II.

The firm announced a final close of USD 474m in early January, short of the USD 600m target but above the USD 384m raised for Fund I. “Every time there’s a bumper year for IPOs, it is typically followed by a bumper year for fundraising. And whenever there’s an IPO drought, it is followed by a tougher year for fundraising. We should be grateful for where we are,” Nash added.

Building partnerships

Capital was raised from institutions, family offices, and high net worth individuals, with Fund I LPs accounting for USD 400m. In addition to a clutch of development finance institutions, participants include Financial Investments Corporation, a US-based family investment group, and Canada-based Generation Capital, a spinout by a team that used to make investments for the Thomson family.

“The investors that backed us for Fund I are taking a longer-term bet on Southeast Asia. We are keen to develop these relationships,” said Oliver Rippel, another founder of Asia Partners and, alongside Nash, one of two partners. “In that sense, Fund II saw more of a natural expansion of the Fund I investor base.”

Co-investment is one area of collaboration. To preserve alignment, the firm doesn’t offer co-investments to LPs unless the fund is also participating. (In addition, the GP commitment to Fund II – drawn from employees and advisory board members – is 9%, relatively high by Asian standards).

These opportunities tend to be a good fit for entrepreneurial family offices, Nash noted, adding that one LP has not only re-upped in Fund II but also started pursuing a direct mid-market private equity investment strategy in Southeast Asia. Other family offices reach out to Asia Partners when making separate deals and act as a sounding board for some of the VC firm’s investment decisions.

“Entrepreneurial family offices are some of the best LPs in the world because they are entrepreneurial. They have made their money trying to zig when others zag,” said Nash. “And they love the gross profit potential that we love about Southeast Asia.”

The strategy is unchanged from Fund I. Asia Partners will construct a relatively concentrated portfolio – Fund I has just six portfolio companies, Fund II is expected to have a few more – writing equity cheques of USD 20m to USD 80m. Investments tend to be Series D and E rounds, by which point the target companies should have a sightline to profitability and IPO readiness.

While the firm underwrites investments based on IPOs, and prefers listings on US exchanges, that doesn’t mean exits must be by IPO. Public market sales and M&A are expected to feature, with Rippel pointing to expertise in both channels: he used to work at Naspers, which was a seller in Walmart’s bumper acquisition of Flipkart; Nash previously led Sea, which listed on NASDAQ.

Changing dynamics

Exits of any kind are challenging right now. At the same time, what might come to be known as the great crash of 2022-2024 is characterised by a slowdown in deployment. Growth-stage investment in Southeast Asia’s technology sector reached USD 10.1bn in 2021 – equal to the previous four years combined – then dropped to USD 4.1bn in 2022 and USD 1.6bn in 2023, according to AVCJ Research.

The most conspicuous withdrawals have been by global growth-stage investors, which means Asia Partners faces less competition as one of relatively few local pools of expansion capital. This allows the firm to be very selective in its underwriting, waiting for the right opportunities at the right valuations, Rippel explained.

“We underwrite as if it’s the last cheque the company needs to get into cash flow-positive territory. When business models require significantly more capital than that, they have a tougher time. The era of those raise-the-money-to-keep-the-lights-on investments is over,” he added.

“We spend most of our time looking at companies that are relatively capital efficient and already at break-even or beyond break-even or will get there in the next 1-2 years. These are companies that can raise more capital if they want; that can expand into neighbouring markets if they wish.”

One portfolio company, telehealth platform Doctor Anywhere, has even completed a take-private with the acquisition of Singapore-listed Asian Healthcare Specialists. Another, used car trading platform Carsome, has embarked on an M&A spree of its own, picking up four assets in 2022, including iCar Asia for an estimated USD 200m.

Asia Partners has participated in follow-on rounds, but these tend to be modest in size and limited to existing investors. There haven’t been any down rounds or flat rounds to date, but the team is aware of these happening in Southeast Asia more broadly – and it feeds into the notion that growth-stage companies not only need capital but also assistance in sorting out their problems.

Every senior team member at the firm has operational experience. For others, promotion to vice president level is conditional on spending time working for a start-up, if they haven’t already. Nash hopes that by helping build better businesses, strategic interest in Southeast Asia will be revived.

“From 2000-2012, there was a tremendous amount of inbound cross-border M&A for Southeast Asian targets. Then over the next decade, for very sensible reasons, cross-border M&A in Asia gravitated towards targets in China,” he said. “We think that both regions have an important role to play in Asia.”