Venture capital investment in Asia has slowed sharply so far this year after a record 2018, and for consultancy KPMG that signals a return to more normal levels.

Yet appearances can be deceptive.

Market activity suggests the momentum that has steadily built in recent years – driven largely by investment in technology – is, if anything, accelerating.

Last year there was $103 billion of venture capital financing done in Asia (largely in the second quarter), but in the first quarter of 2019 the figure came to just $13.1 billion, KPMG data shows (see graph below). 

Effie Vasilopoulos

Similarly, venture funds raised for Asian investment totalled just $2.2 billion in the first quarter, less than 10 times what was achieved in all of 2018.

Looking beyond the data, however, gives a different impression. 

For example, Effie Vasilopoulos, a Hong Kong-based partner at law firm Sidley Austin, said in May that her practice's work is currently dominated by work related to venture fundraising.

“Five years ago, around 90% of [my team’s] time was spent on late-stage or leveraged buyout investments and only 10% on early-stage or venture capital work,” she told AsianInvestor. “In the last 12 months, that ratio has reversed.”

ASIA: VENTURE FUNDS RAISED AND VENTURE CAPITAL INVESTED
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Vasilopoulos co-leads Sidley’s investment funds, advisers and derivatives group, which works mainly on fund formation but also helps asset owners with reviewing fund documents and with due diligence on fund sponsors.

CHOICES, CHOICES

Asset owners confirmed they are seeing a big rise in the choice of venture capital managers globally these days, including in emerging markets.

Anne Fossemalle, director of private equity funds at the European Bank for Reconstruction and Development (EBRD), said she had seen a significant increase in credible VC fund managers coming to market in the past five to six years. EBRD invests in North Africa, Central and Eastern Europe (CEE) and Central Asia.

“The past two years have been particularly dynamic, with a vibrant pipeline of early-stage and early growth-stage opportunities,” Fossemalle said.

Anne Fossemalle, EBRD

“Generally speaking, the VC ecosystem has come a long way in this period in CEE,” she added. “Importantly, it is not just the number of VC funds coming to market that has changed, it is also the strategy. We see far more funds focusing on truly cutting-edge technologies with the potential to be globally disruptive (rather than merely internet-enabled businesses) than we did before.”

Venture capital firms are also proliferating in the US, the head of Asia investments at a North American pension fund told AsianInvestor. There are now 700-plus such managers in the US now, he said, compared to between 100 and 200 five years ago.

EARLY-STAGE ATTRACTION

A major driver behind the mushrooming of venture funds is increased demand for earlier-stage investment in technology.

Investors, large and small, are aiming to realise the value of potential ‘unicorns’ – startup companies worth $1 billion or more – at an earlier stage, Vasilopoulos said.

For instance, pension funds, such as Hostplus and First State Super in Australia, have been ramping up their allocations to venture capital funds in the past few years. 

Demand has also been accelerating among sovereign wealth funds, 

Data published in May by the International Forum of Sovereign Wealth Funds (IFSWF) shows SWFs executed a record-high 63 deals across different stages of venture financing in 2018, nearly quadruple the 17 in 2015. The sharpest growth came in the earlier (A to D) funding rounds.

And they are now leading or co-leading more venture transactions than ever before: 35 funding rounds last year, more than twice the 16 seen in 2017 and more than four times the number in 2015 London-based IFSWF reported.

Asian state funds – most notably Singapore's GIC and Temasek – have long been at the forefront of such activity, but the trend has been spreading across the SWF segment. 

SWFs are increasingly moving to make direct investments in venture deals, either on their own or with partners, and moving away from committing to commingled funds. That reflects these institutions' changing approach in other areas of private market investment.

Moreover, Japan's Softbank – backed by Saudi Arabian and Abu Dhabi state money – has unveiled an 'acceleration fund' to invest in early-stage tech and its Asian venture arm is gearing up for expansion.

AsianInvestor highlighted SWFs' then more nascent but growing interest in venture investment in technology back in October 2017. It has been driven by a desire not only to boost returns but also to glean information that can inform their national agendas and the growth strategies of their portfolio companies. 

Look out for an in-depth feature on the changing landscape for technology investment in the upcoming (Summer 2019) edition of AsianInvestor magazine.