In this article, we look at the record-setting quarter for venture capital transactions in Asia, and examine the impact this has had on the exit environment, fundraising and investor interest.
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Venture capital deal value bounced back during the first half of 2017, with a record-setting second quarter in Q2, which saw aggregate deal value rise to $47bn – the highest amount in any individual quarter on record (Fig.1). The largest proportion of deal value came from Asia: having increased to $23bn it represents almost half of the global value of all deals completed in Q2.
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Deals On The Rise
Since 2013, Asia’s share of the number and aggregate value of venture capital deals globally has grown consistently. As at July 2017, Asia accounted for 43% of deal value for 2017 YTD – the most of any region – as well as 31% of all deals (Fig. 2). The majority of deals in the region occurred in Greater China, with 901 transactions representing $28bn in aggregate deal value, followed by India with 448 deals for $6bn. Within
Southeast Asia the majority (94) of transactions took place in Singapore, while Indonesia accounted for the largest proportion ($1.4bn) of deal value, the highest in the Far East.
Managers looking to deploy capital in Greater China generally favour the telecoms industry, which makes up $14bn of deal value in the region. Three individual transactions anchored the telecoms industry, each worth more than $1.0bn. The largest completed deal was a $5.5bn deal for Didi Chuxing, the mobile transportation platform, which raised financing from new investor Silver Lake as well as existing investors SoftBank Group, China Bank of Communications and China Merchants Bank. The other largest deals involved Zhejiang Koubei Network Technology Co., Ltd. ($1.1bn) and a late stage round for Toutiao ($1.0bn). Zhejiang Koubei Network Technology Co., Ltd. is a joint venture between Alibaba Group and Ant Financial Services Group, offering a mobile platform for food and beverage services, while Toutiao is among the most popular news aggregation platforms in China.
While venture capital deal value in Asia continues to grow, exit value has been relatively stagnant since Q1 2016 when 74 venture capital-backed exits accounted for $4.8bn in aggregate value. From Q2 2016 onwards, the region has seen an average of 51 exits worth just over $1.0bn per quarter (Fig. 4). Greater China has generated the majority ($7.6bn) of capital from exits since the start of 2016, while India has seen the most exits (144) over the same period (Fig. 5).
The largest exit for an Asia-based portfolio company since the start of last year was the $2.7bn merger of YTO Express, which provides courier services, with Dayang Group in March 2016. Since the beginning of 2016, trade sales accounted for 55% of exits and 66% of aggregate exit value in the region (Fig. 6).
Asia-focused venture capital fundraising increased slightly over Q2 2017: 31 funds secured an aggregate $4.2bn, one-quarter of all funds closed and 18% of capital raised globally (Fig. 8). The largest fund
focused on the region to reach a final close in Q2 was Sequoia Capital India IV, which surpassed its target size by $350mn to secure $850mn in commitments from University of Michigan Endowment, Rockefeller Foundation and Liberty Mutual Retirement Benefit Plan, among others, for investments in consumer technology and healthcare companies in India.
According to Preqin’s H2 2017 fund manager survey, 51% of GPs have seen an increase in appetite for venture capital among Asia-based LPs (Fig. 9). The results of Preqin’s latest investor surveys indicate that LPs are significantly more likely to target investment in their domestic region than funds focused elsewhere, and this remains true for Asia-based investors. Of investors headquartered in Asia, the majority (85%) are targeting Asia-focused funds in the next 12 months; however more than half of North America-based investors also plan to target the region, followed by a third of those based in Europe (Fig. 10). Among all investors surveyed, 47% indicated they would be targeting Asia-focused funds over the next 12 months (Fig. 11).
Funds In Market
It is clear that fund managers have noticed the increase in investor interest throughout Asia and are reacting accordingly, as 47% of capital targeted by funds currently in market is earmarked for investment in the region (as at July 2017). China State-Owned Capital Venture Investment Fund is on track to be the largest venture capital fund ever raised, currently seeking a record $30bn for investment in Asia. With this fund removed, the remaining Asia-focused funds on the road are seeking $39bn in aggregate capital, more than 3x that of Europe-focused funds.
As at July 2017, Asia-focused venture capital funds hold a record amount of dry powder: $56bn is available for investment, accounting for 43% of the venture capital industry’s total dry powder. Asiafocused dry powder levels have grown substantially since the end of 2016, up 66% ($22bn) over the first half of the year (Fig. 13).
Asia’s share of annual global venture capital deal value has risen six percentage points since 2015 to reach 43% for 2017 YTD, a positive sign for the industry in the region. The combination of deal activity, increased investor appetite and record dry powder levels should lead to a strong finish to 2017, but fund managers must show investors that they can produce returns, starting with sourcing the right exit opportunities and deploying the $56bn in capital earmarked for investment in Asia.
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