Digital platforms have benefited from the pandemic and the investment in technology has stayed strong through that time. As complex macroeconomic and geopolitical dynamics kick in, how should can investors navigate the world of tech?

In an M&A forum organized by Mergermarket in Hong Kong recently, a panel comprising investors and operators presented their perspectives on digital transformation and related business opportunities in the Asia Pacific region. Xiaolin Zheng, Partner at CE Innovation Capital, led the discussion with the following panelists:

• Evan Auyang, Group President, Animoca Brands
• Peter Wong, Chief Technology Officer, Prenetics
• Shengyan Fan, MD, M&A, China Everbright
• Raj Shastri, Head of M&A, Circles.Life
• Gaurav Nayak, Sales Director, Datasite

Web3 and other opportunities in tech

One can map the curve of Web3 adoption to Internet adoption and the dot com boom of 2001-2002 and see that the metrics are quite similar. With 5 billion Internet users and growing -- including 3.5 billion users who are also gamers -- it is a huge market for Web3, which is experiencing a lot of volatility and skepticism just like in the early days of Web2. Investors then were becoming familiar with the definitions of ‘offline’ and ‘online’.

Nowadays, the high frequency words being used for new tech companies is ‘off chain’ and ‘on chain’. Web3 makes it possible for groups to gather and form their own identities through asset ownership, which is made possible with blockchain. This is profoundly a step up from Web2 as blockchain allows discovery that is organic and community-driven, which is the key reason this whole space is getting so much attention.

Investors are focused on building the ecosystem by supporting entrepreneurs, the chain, and the applications out of these companies and support one another which is chain agnostic. To have some skin in the game, funds are investing in late-stage companies on a trajectory to the IPO stage in the next three to four years.

On the other end of the spectrum, investors are positive and bullish about investing in hard tech and industrial space. Some of the emerging areas are in the space of digitalization and carbon neutrality. This essentially requires optimization in two areas.

• One is the process or quality improvement, production efficiency improvement, and accuracy improvement to enable the equipment or operator to detect, generate, and analyze better data points and make better-informed decisions accordingly.
• The other concerns are energy efficiency including emissions reduction and new energy technology.

This is redirecting investment discussions into the operational side encouraging a longer and more thorough due diligence process, which is a positive development for investors.

In the Philippines, Thailand, and Indonesia digital wallets are gradually becoming lifestyle apps with more and more consumers using a digital wallet or their mobile phone to make payments.

Fintech takes center stage in Southeast Asia

Fintech is emerging as a hot sector out of Southeast Asia. Digital banking is seeing action either through investment or acquisition. The Philippines, Singapore, and Malaysia have widely granted digital banking licenses. Big payment platforms and traditional consumer retailers are joining hands with digital banks.

Digital wallets are becoming the heart of digital transformation in Southeast Asia. In the Philippines, Thailand, and Indonesia digital wallets are gradually becoming lifestyle apps with more and more consumers using a digital wallet or their mobile phone to make payments. With ecommerce and Internet penetration, investors expect explosive growth in fintech in the region in the next 5 to 10 years, similar to what China witnessed in 2010. Challenges will lie in costs adding up due to regulatory compliance and lack of built-up infrastructure. Still, the overall direction of Fintech in Southeast Asia looks quite promising.

The biggest challenge at the investment stage has always been how to reasonably project the growth trajectory of the company in five to six years and assess the risk along the way.

Digital transformation and challenges for investors

Given current unfavorable macroeconomics and geopolitical tensions, the investment climate is that of caution. Companies want to preserve cash in the wake of rising inflation, an increase in interest rates, and a job market demanding higher compensation leading to a decline in business valuations.

It is clear to investors that whether it be Web3 or a new transformative tech space, old rules still apply on how to assess the fundamentals of a company. How a company is managed, its cash flows, profitability, market strategy, the strength of its team, etc. all come into play. PE firms look at how to grow the company and leverage their expertise to help put them on their journey from businesses with a strong concept in the early stage to becoming Unicorns.

The biggest challenge at the investment stage has always been how to reasonably project the growth trajectory of the company in five to six years and assess the risk along the way. The past few years have essentially added more risk factors into that overall analysis including regulatory risk, geopolitical risk, liquidity crunch, and currency fluctuation, to just name a few.

Investors are thus trying to downplay the sector and industry angle, but instead, focus more on the company's fundamental ability to manage its cash flow and working capital needs so that the target or portfolio company can sustain itself with sufficient buffer to weather through exogenous challenges. 

In the current economic scenario, M&A is a more viable exit, especially in the tech domain.

Is M&A the preferred exit option?

For listed companies, exit options via the capital market continue to be viable especially as companies enter recap cycles. However, the most significant part of PE funds exits was through M&A or trade sales last year.

In the current economic scenario, M&A is a more viable exit, especially in the tech domain. Tech companies are always looking to add to their capabilities and hence they are always looking to add to their existing stack. Now is a good opportunity to look at companies with specific skill sets, with a good team. The valuations are much more realistic today than they were a year ago and understandably venture capitalists and PE funds are more willing to sell.