| This is a guest post by Christopher Beselin, who is a multi-exit company builder that resides in Vietnam. Christopher was part of the founding team of Lazada (acquired by Alibaba), Intrepid (acquired), Fram (IPO’d) and Endurance Capital Group. |
Here it goes, next edition of Building, investing & exiting in Southeast Asia. Firstly, thanks a ton for all positive feedback both online, and in-person, during the first week of this project – it means a lot!
Next week, I’m traveling to Middle East for the Super Return conference, begging investors for more money to deploy into our great corner of the world! I’ll try to get Part II of “Golden rules of company building“ out as a mid-week special next week as well, but bare with me if investor pitches causes delays…
Why do we have so few IPO-exits coming out of Southeast Asia?
– especially locally listed ones
The headline “Singapore losing listings because the market has performed poorly, and valuations are low“ in the Singaporean paper, The Business Times, reminded me of a topic that has been an issue for Southeast Asia for quite a number of years now. The article is mostly behind a paywall, so I couldn’t actual read the thing, but I believe the headline says enough.
The broader question at hand here is – why do we have so few growth company-IPOs coming out of Southeast Asia? For a couple of the companies that I have been part of co-founding/building in the region, we have evaluated and executed IPO-processes (both all the way to listing and in parallel to a later strategic divestiture to a trade acquirer). When you are in the midst of these processes first-hand, the main underlying issues crystalize more clearly:
- Many Southeast Asian exchanges still have quite conservative and strict listing rules primarily in terms of over-emphasizing historical cash flows and/or profits (e.g. one of the reasons why local unicorn gaming-group VNG is listed on the Vietnamese OTC exchange Upcom and not on the Ho Chi Minh City mainboard) – e.g. a company aspiring to publicly list needs to submit audited accounts that show multiple years of profit and/or positive cash flows before being eligable for a listing. In practice, this rule precludes most tech companies that typically come with many years of losses behind them as they have been investing in rapid growth. These types of rules that require long history of profitability have been removed since long from the largest growth stock exchanges in the world, but unfortunately we are not there yet for most of the Southeast Asian stock exchanges.
- Due to recent geopolitical turmoil around China, Southeast Asia has all but lost its historical natural go-to “growth/tech stock exchange“. The Hong Kong Stock Exchange used to offer Southeast Asian growth companies most of what they would require for a successful tech/growth company listing – healthy trading liquidity, an investor base that understands & appreciates growth companies (and consequently are ready to pay the required growth multiples for them) along with the geographical proximity that makes it much more likely for a wider shareholder base to invest the time required to stay up to date on the progress of a listed growth company over many years of investment. As many Southeast Asian growth companies have either co-founders and/or investors that are meaningfully concerned about, or even prohibited from, having its assets listed in China, Hong Kong has since a few years back largely fallen off the map for Southeast Asian tech IPOs.
- Unfortunately, the second best alternatives for growth exchanges for Southeast Asian companies are quite poor substitutes. When we ourselves evaluated Singapore for this purpose, a couple of significant issues quickly became apparent: i) the general local public market investor base is, by and large, not used to tech companies and are not comfortable paying growth multiples for them and ii) the trading liquidity both on the local growth board (SGX Catalist) and for small/midcaps in general is quite low. When starting the process, we were thinking: “how bad can it be?“. Well, unfortunately quite bad – in our case, the valuation multiples offered locally from the investor base in Singapore were roughly half, or less, than what you would see for similar type and size of growth companies listed in e.g. the US. It’s simply to big of a haircut for company builders to accept, when it comes to their big liquidity event that they have been working so hard to get to.
- Finally, listing a company in the US is a natural alternative for tech companies all over the world. The tech-savvy investor base is certainly there and you are gaining access to probably the highest tech valuation multiples in the world. However, in this regard, Southeast Asian growth companies need keep one (sometimes a bit abstract) word/phenomenon quite carefully in mind – trading liquidity. Trading liquidity basically measures what % of all the company’s shares that are being traded during an average trading day (the absolute USD-amount traded is of course also relevant). The more trading liquidity you have, the closer your listed share price will reflect the intrinsic/true value of your company, or at least the current investor consensus of that intrinsic value. The less liquidity you have, the more disconnected from intrinsic value, and the more random, your share price becomes. In general, the more shareholders you have in your public company, the more people will be trading your share on any given day and hence your trading liquidity goes up. Strangely enough, there is this global phenomenon where i) investors care much more and invest a (highly) disproportionate share of their total net worth in businesses that are located in their close geographical proximity (i.e. there is a somewhat irrational broad based geographical bias of investing that actually works against the average individual investor’s need for geographical diversification) and ii) public shareholders are generally (very) lazy and don’t want to have to invest significant amounts of time in researching the companies they invest in (especially not the smaller ones). This in turn creates fundamental problems for companies that are listed in the US, but have their operations in “far away lands“ that inevitably takes the US investor meaningful research to understand. In practice, (i) and (ii) means that after the initial IPO-hype, the US investors generally lose interest in (small and mid-sized) public Southeast Asian growth companies over time. Consequently, the number of shareholders of these US-listed companies drop continuously, and with that the trading liquidity – ultimately the share price becomes less and less connected to the underlying progress and true value of the business. In fact, when this process reaches its ultimate and most painful stage – the share price movements much more closely correlates to the total number of remaining shareholders in the company, than with the underlying progress of the business (i.e. its assets, growth, cash flows, etc.). For large Southeast Asian growth companies, e.g. Sea Group and Grab (both still in the 10-20 bnUSD market cap range after significant price corrections), this is less of a problem as they are relevant for a larger and more stable professional institutional investor base that can afford to invest time in the required understanding of the business over the long term. However, my rough sense is that anything below 3-5 bnUSD of market cap coming out of Southeast Asia to list in the US, will run the risk of suffering this shareholder-exodus-disease.
On a more positive note, local listing rules in Southeast Asia are evolving and we can see local stock exchanges making serious attempts at accommodating tech/growth company listings – herein, the local listings of GoTo and Bukalapak on the Indonesian Stock Exchange are interesting green shoots, even if also they have suffered the fate of globally correcting tech valuation multiples over recent past.
Teaser: Golden rules of company building, part II
Below is an extract from our next article in the series “Golden rules of company building” that we aim to release as a mid-week special unless investor meetings comes in the way.
Never wait. Waiting is probably one of the most terrible things a company builder can do. There is in 9 cases out of 10 not a good reason to only be waiting for anything. If you think your only option is to wait, think again. There is always a proactive preparation for an anticipated next step that you can be doing or even start to prepare a plan B, C, D, E if whatever you are waiting for should fall through (which should always be the base case assumption, as touched upon in previous edition). Besides that, there is in most cases a way to push things through much much faster than by just waiting for a base case timeline to complete. Typically, the approach to achieve this is to apply a radical focus on “good enough” and to reshape your team’s perception of what a base case timeline for a certain task should look like. A good basic mindset for an early-stage company builder is that everything can be completed today. Why wait for someone to send you a perfect submission in 1 week, if she/he can send you 80% of the answer in 1 hour? Why allow yourself to send a perfect email that takes 3 hours to write/edit, instead of just sending the key message and shoot across in 2 minutes? At the end of day, a few of these “radical” timelines will of course not materialize, but then you will still benefit from a much faster turnaround than originally anticipated.
Until next time, let’s build it!
Chris
