Here’s why Private Equity and Venture Capital firms are investing billions in Asian tech and healthcare companies. By Michael Megarit
Why Big Finance Firms are Investing in Asian Tech and Healthcare
Asia is the new economic frontier.
With a combined population of more than 4 billion people, the majority of which will enter the middle class over the next 10 years, the region’s rise on the global scale is not surprising.
In fact, by 2030, Asia will become the global economic powerhouse.
Investors are well aware of this fact and are keen to capitalize on the seemingly infinite economic possibilities.
Since 2015, Venture Capital (VC) firms invested more than $500bn in Asian companies.
While China cannibalizes 80% of total investments, VC firms are increasingly interested in other parts of the continent. However, since COVID, VC firms are particularly interested in investing in Asian technology and healthcare startups.
1 – Asia is growing at a phenomenal pace
Asia is the world’s fastest growing continent.
With a total of 48 countries, a population of 4.689 billion people and the world’s highest growth rate, Asia is clearly the world’s next economic superpower.
In 2020, the region’s GDP overtook the rest of the world’s combined GDP. The World Economic Forum claims that by 2030, Asia will contribute roughly 60% of global growth. Further, the Asia-Pacific region will be responsible for 90% of the 2.4 billion new members of the middle class entering the global economy.
In truth, the bulk of Asia’s economic growth will come from just a handful of countries, such as China, India, Indonesia, the Philippines and Malaysia, where annual growth rates average roughly 5% per year since the early 2000s.
This phenomenal growth is contributing to the emergence of a large middle class.
In 2020, roughly 2 billion Asians were considered middle class. By 2030, this number will rise to 3.5 billion. In contrast, the North American middle class stood at 647 million last year and projected to reach 689 million in 2030. Thus, in less than 10 years, Asia’s middle class will be 5 times larger than America’s.
This new middle class is increasingly sensible to its quality of life and expects the same standard of living as Western nations.
Thus, the virtuous cycle of economic expansion is on full display:
- Consumption is on the rise.
- International investors are shifting their attention to Asia.
- Entrepreneurialism is at its peak (there are nearly 200 unicorns in the Asia-Pacific region).
- Asian multinational corporations are emerging.
Obviously, this intense level of economic activity is attracting the interest of international investors.
In particular, Private Equity and Venture Capital (PE/VC) firms are cash-rich and eager to broker deals. They are particularly interested in two high growth sectors with significant ROI potential: healthcare and technology.
2 – The pandemic has increased interest in healthcare
Since COVID, PE/VC firms are accelerating their investments in the Asian healthcare sector.
Since 2020, aggregate deal value stands at $20 billion. Halfway through 2021, 561 healthcare-related VC deals were brokered for a total value of $14 billion – a 67% increase compared to 2020.
Out of 1000 deals, more than 60% were brokered for healthcare assets in China. In terms of value, China accounts for nearly 90% of all deals.
While foreign investors are often rocked by the Chinese government’s unexpected reforms, they are still eager to invest in a country with solid fundamentals. China’s “Made in China 2025” plan, launched in 2015, aims to develop the nation’s healthcare Research & Development R&D.
There is tremendous opportunity and PE/VC firms are eager to enter the market and place their bets on the future winners.
Clearly, China concentrates the majority of PE/VC investments. To date, only 30% of the healthcare deals were completed in Japan, South Korea and India.
Indeed, recent PE/VC data shows that investments across the Asia-Pacific region are highly fragmented. Economies and regulations differ greatly from country to country, which makes selecting suitable investments difficult. Analysts need to perform thorough due diligence, which requires resources and extensive risk-reward calculations.
However, investors believe that over the coming years these countries will follow China’s and India’s leads and open their markets to foreign investments.
3 – The Asian digital economy is in full bloom
In Asia, as everywhere else in the world, the coronavirus pandemic serves as a tailwind and catalyst for technological innovation and digitization.
Virtually all companies have to embrace technology to compete and grow.
By December 2022, the South Asia technology sector is expected to reach $300bn in market cap. By 2025, it is expected to exceed $1tn.
In South Asia alone (China excluded), there are nearly 50 unicorns. These startups, valued at $1bn or more, are in mostly technology-centric. For example, Flipkart is valued at nearly $40bn, PayTM is valued at more than $15bn, and Byju is valued at roughly $17bn. These are merely three of the dozens of large tech companies emerging in the region.
The 50 Southeast Asian unicorns’ combined value tops $300bn, and they are expected to grow at a CAGR of 75-200% over the next 3-5 years. In addition, Prequin estimates that at least another 100 companies, presently valued between $250mn and $1bn each, will reach unicorn status in the next few years.
In parallel to the rise of billion-dollar startups, regional tech powerhouses are emerging and establishing themselves on the global stage:
- SEA ltd., a Singaporean consumer internet company listed on the Nasdaq, increased its market capitalization to $150bn from $50bn. Some analysts claim it could reach $1tn in market cap by 2030.
- Zomato, a food delivery app listed on the Indian stock exchange, is currently valued at $12bn.
- Bukalapak, an Indonesian e-commerce company, has a valuation of nearly $8bn.
- Kredivo, an Indonesian Fintech company, will become the fastest seed-to-IPO company across the entire region after announcing a $2.5 billion SPAC deal with Victory Park Capital.
As a result, PE/VC firms are rushing to invest in these technology startups in the hopes of discovering the Asian Amazon, Google, Facebook, or Netflix – or, as some would now say, the next SEA Ltd. or Flipkart.
About the Author
Michael Megarit is a partner with Cebron Group. With over 25 years of domestic and international corporate finance experience, he provides M&A and capital advisory to high-growth technology companies.