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The collapse of Silicon Valley Bank continues to reverberate. Bank stocks have taken the hardest hit in Europe and the US. But, in Asia, the fallout is being felt most by smaller companies already struggling for funding amid depressed investor sentiment.
There is some optimism, however. Asia Pacific is set to be the world’s fastest-growing region this year, buoyed by the recent reopening of China, which should enable it to avoid the slowdowns being expected in other major economies. Some countries in the region, such as South Korea, remain popular with venture capital investors and are continuing to see strong growth in deal volumes.
Still, overall venture capital returns across the Asia Pacific region look set to remain weak in the coming months — a sharp reversal from the near 25 per cent recorded in the three years to 2020. Many lossmaking companies that enjoyed spectacular top-line growth in 2018 — when venture capital spending hit an all-time high — are now facing a reality check of tight funding conditions.
In the public markets, foreign outflows from Asian equities hit a record high last year. Major benchmark indices including Japan now trade at a discount of around a third to the S&P 500 index based on forward earnings valuations. New listing pipelines remain slow.
Even for tech businesses that enjoyed a pandemic sales surge — such as those in ecommerce and social media — revenue growth is slowing and, with it, venture funding.
But there are exceptions. “Investors are showing an increasing preference towards emerging markets and earlier stage VC investments,” says Angela Lai, senior research analyst at Preqin. “Early-stage Asia emerging market opportunities in India and south-east Asia tend to have smaller ticket sizes across a diversity of sectors, and starting valuations are lower relative to their potential.”
Within south-east Asia, Singapore has been a standout as a hub for high-growth companies. Rex International Holding, which leads the fifth FT/Statista annual ranking of high-growth Asia-Pacific companies, and NW Corporation in second place, are part of the city-state’s booming energy industry. Rex recorded compound annual revenue growth of 630 per cent over three years to 2022 covered by the survey by branching out from its core oil and gas businesses into software, including mapping programs for oil exploration.
Fintech and telehealth are also strong performers for the city-state. Telehealth operator Doctor Anywhere and health and wellness ecommerce company Maneuver Marketing are prominent at the top of the list. High rates of mobile phone adoption across Asia and its large population of under- or unbanked consumers helped propel these sectors during lockdowns.
The expansion of fintech has been especially notable in Indonesia — a country of more than 270mn people where many have limited banking access. Jakarta-based fintech start-up AwanTunai, placed 35th in the ranking, has grown rapidly since its 2017 launch by offering lending and digital payments solutions to small businesses and consumers.
This month, a $270mn equity funding round for Singapore-based fintech lender Kredivo underscored continued interest in the sector, despite tightening financing conditions.
A resumption of travel is helping to boost activity, too. Indonesia, the Philippines and Thailand are among the markets that have returned to pre-pandemic growth levels. As routes return to normal, tourism revenues, which account for about 10 per cent of these economies, should turbocharge a recovery. The IMF expects growth in Asia to accelerate to 4.7 per cent this year, from 3.8 per cent previously.
But the biggest boost to the region, by far, will come from China. After reopening its economy in December, the country has seen factory activity come roaring back. In February, some economic indicators hit their highest level in more than a decade.
And, for every percentage point of growth in China, output in the rest of Asia goes up by around 0.3 per cent, according to the IMF. About half of all trade in Asia takes place between the economies in the region.
Rising geopolitical tensions between China and the US, plus heightened regulatory scrutiny around Chinese groups, will also provide growth opportunities for companies outside of China, as multinationals scramble to diversify their suppliers and operations.
Companies that have proprietary technology and strong domestic demand for their products have held up especially well. For example, South Korea’s autonomous driving robot company Twinny, ranked 50th on the list, has recorded annual growth of 128 per cent, with most of its sales derived from its home market.
Founder and chief executive Cheon Youngseok says that Twinny’s warehouse order-picking robots can lower labour costs and help overcome worker shortages. “Covid has led to a boom in demand for our warehouse automation and ecommerce logistics,” he says, adding that “a favourable regulatory environment” has helped to bolster growth in a rapidly growing market.
But he admits that growth companies now face more scrutiny. When interest rates were low and the tech sector was booming, investors were able to overlook the weak financials of promising start-ups. Now, as competition for capital increases and investors become more conservative, Cheon says companies will need proven track records of revenue growth and profitability to attract capital.
It is a challenge he feels able to rise to, however. “Fundraising has not been difficult for us, given strong demand for our products and competitive advantage in technology,” he explains.
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