Corporate Financing Analysis - Asian VC Industry Growth Story On Track - 10 APR 2017


The Asian venture capital (VC) industry is set to enjoy its moment in the sun this year. After several years of steady returns and consistent levels of investment, VC interest in the region - from investors both closer to home and from afar - is building. In our view, the reliability of the market, when compared with the volatility and uncertainty caused by the onset of economic and political shockwaves over the past couple of years, will certainly be part of the sector's appeal. As a result, almost 200 funds are currently seeking capital from investors to deploy into VC opportunities across the region - including the China state-owned Venture Investment Fund, which will become the largest VC fund ever raised if it reaches its target close. Preqin data show that collectively those 200 funds are targeting more than USD50bn in fresh closes from investors and, as of the time of writing, they have already secured more than half of this intended haul via interim closes. A quick look at the past few years of Asia-focused VC fundraising shows that new closes peaked at a level of USD14.5bn in 2014 before declining marginally with total raises worth USD14.1bn and USD13.3bn in 2015 and 2016 respectively. Cumulatively some 333 funds focused on Asia have raised USD43.3bn in capital commitments since the start of 2014. We believe, however, that due to key markets in the region opening up to the outside world, the VC industry in Asia now drawing in a larger share of its investment from offshore and the burgeoning Asian start-up industry building a head of steam, fundraising levels will head towards a new high this year. Broadly speaking, the numbers suggest that the market's long-term ascendency remains on track, even if it is likely that the VC industry's development will encounter further challenges along the way as it continues to develop.

US Still The Home Of The Industry
Active Venture Capital Fund Managers By Country
Source: Preqin , BMI

Silicon Valley Remains On Top

To put some perspective on Asia's importance to the VC industry on a global scale, we continue to believe that it will be a while before Silicon Valley is unseated by a challenger from Asia as the world's leading venture capital, and by extension its top tech hub. This view is supported by Preqin data that show that the US remains way out in front in terms of the active number of VC fund managers headquartered there. As of the close of 2016, the North American nation was home to as many as 1,020 funds. China, meanwhile, led the way for Asia and was in second spot in the global rankings as of the same date, and was home to 170 VC fund managers. As the numbers suggest, China is leading the way for Asia in the VC worlds, however, we note that the Middle Kingdom is far from alone in embracing the industry; other nations such as India and Singapore have both shown an eagerness to create a backdrop for the development of VC investment through recent shifts in government policy and local regulations. To this end, Asia's second highest representative in the rankings for the 2016 full-year period was India, with 68 fund managers based there.

Singapore And Fintech Singapore is arguably the easiest place in Asia for VC funds to operate, with its rules and regulations for the VC and private equity industries swiftly shifting towards falling in line with those found in the spiritual home of the alternative assets industry, the USA. Thanks to moves by the government of Singapore to promote the city-state as a financial hub welcome to innovation, the tech industry is gaining a foothold there and is expanding. Part of the lure of Singapore rests with its requirement of capital charges, something the government has relaxed so that they are not as high for VC fund managers as they are for other funds. Indeed, the loosening of regulatory requirements and business conduct rules has seen the sector take root in Singapore. We note that such developments are more broadly part of efforts to help sustain Singapore's recent economic growth story. Our data show that real GDP growth in Singapore is forecasted to reach a level of 1.9% in 2017, before accelerating to 2.2% in 2018 and 2.6% a year later in 2019.

Within the city-state's broader appeal, we highlight that Singapore's strong ICT fundamentals and the establishment of government regulations aimed at growth will facilitate the development of the financial technology (fintech) industry in the local economy over the long term. Such developments require investment, of course, and what better place for it? Singapore's status as a regional banking hub makes it even more attractive for start-ups looking to enter the region. Fintech start-ups in Singapore benefit from high levels of education, low tax rates, efficient procedures to set up their business, the availability of government or private grants and tax incentives. Over 2015-2016, around 210 fintech firms operating in Singapore were opened, the fastest growth rate in Asia, according to KPMG. What is more, the country already has one of the world's most technologically advanced telecoms markets, with 3G/4G subscribers numbering 8.4mn and broadband internet subscribers at 4.3mn as of the end of the 2016 full-year period. Consequently, the population is very tech-savvy, which, coupled with high financial inclusion and debit/credit card penetration, means that Singaporeans are well equipped to embrace developments in payment platforms and other mobile-based fintech applications as they move in.