Vistra Insights

Caroline Baker on venture capital trends and the lure of Southeast Asia

Trade tensions, Chinese debt reduction and other factors have led to a 90 percent drop in Chinese investment into the U.S. over the last couple of years. Despite this decline, venture capital in the United States continues to be popular, with U.S.-based VC firms raising over $28 billion in the first half of 2019. That’s up nearly 10 percent from the same period last year.

The U.S. has of course long dominated the global VC market, but as the drop in Chinese investment into the U.S. shows, venture capital is undergoing profound global shifts. One area of dramatic VC-investment growth is Asia itself. According to an article in the Nikkei Asian Review, “Asia could overtake North America as the global centre for venture capital funding as early as next year.” The article cites a study indicating that five years ago, North American funds outstripped their Asian counterparts by $169 billion. That gap has narrowed to $74 billion and counting.

Caroline Baker has been well-positioned to witness these changes over the past decade. She began her career at PwC in their asset management practice, with stints in Montreal, Sydney, London and Singapore. She went on to become CFO of Chandler Corporation, an investment firm with $5 billion of private equity and real estate investments, primarily in Asia. In 2014, she became Vistra’s managing director of the Alternative Investments division for Asia, and the global lead for private equity. She's based in Singapore.

How long have you been providing services to venture capital firms, and how do you help them?

We have been working with VC firms for many years, but in particular for the past four years, since the VC boom in Asia started. We provide full fund administrative and corporate secretarial services, as well as deal-structuring support. We can also work with the investee companies of the VC funds, ensuring they stay compliant — which is extremely important for the fund managers!

In what significant ways has the global VC landscape changed in recent years?

It’s becoming much more mainstream. Until recently, the VC market was a bespoke asset class. Now, more and more established fund managers are entering the space, and many entrepreneurs themselves are becoming venture capitalists.

The market has grown immensely in Asia in particular. We are seeing more entrants into the market, and a variety of fund sizes are being launched, from $20 million for first-time fund managers to over $200 million for more experienced ones. Part of the growth comes from local government encouragement. Singapore for example has launched a new venture capital fund managers’ regime to make it easier to set up a VC fund.

Are there certain countries you encourage firms to operate in and certain countries you routinely caution them about?

In Southeast Asia there are many emerging markets that can deliver excellent growth, but are difficult to do business in, such as Vietnam, Indonesia and Myanmar. We don’t want our clients to miss the opportunities associated with these markets, so we encourage them to exercise due care and fully understand the risks before committing. We have offices and partners in many locations in Southeast Asia, so we have lots helping hands for fund managers to speak to.

China is now the second-largest venture capital market in the world, with over 3,500 VC firms. Over the course of your own career, how has China’s rise in this area affected the marketplace and how you do business?

Being in Asia, we have really seen the landscape shaped by China. The opportunity in that market is incredible, but it’s also remarkable the way that China has entered other Asian countries. The amount of money invested is obviously transformative, but they also bring their own way of doing business. We have had to be cognizant of how to work with Chinese investors and embrace their way of operating.

After an all-time high in 2016, Chinese foreign direct investment has declined for two years due in part to tightening regulations and liquidity in China. How has this decline affected your own business over the last couple of years?

We have seen fund launches that were focused on China flag somewhat due to fundraising difficulties, however this seems to be compensated by capital from other sources entering Southeast Asia. We are seeing increasing demand from European and even U.S. investors in the region.

According to Preqin data, VC investment into China was down 77% in the second quarter of 2019 compared to Q2 2018. Why do you think some investors are less enthused about going into China than they were just a year ago?

The U.S. trade war is definitely having an impact on investment into China, as are worries about slowing growth. I think investors may be in a bit of a "wait and see" pattern right now, but my view is that this is temporary, and China is still a strong long-term bet.

China’s Foreign Investment Law was passed this year and goes into effect January 1, 2020. The law addresses foreign investors’ concerns over Chinese requirements to share technology with Chinese companies and the fact that foreign companies often have restricted access to China’s market. The law and related concerns speak to the fact that China is very different from many VC target countries. What are some of the pitfalls of China that foreign investors often don’t consider when targeting Chinese companies?

The first is administration. It is not easy to do business in China, and even after all the due diligence is complete and you decide to make an investment, there is still a lot of work to make it happen. The second pitfall is access to information. You may not be able to get the information that would typically be provided by your investee companies in other jurisdictions. Finally, deal access may not be as easy to come by as in other countries. In China, it’s often driven by relationships.

In light of the U.S.’s increased scrutiny of Chinese investment, where do you think China-based VC firms are likely to turn?

We see these firms looking to Southeast Asia — Indonesia and Vietnam in particular.

Vulcan Capital, the investment house of the late Paul Allen, recently opened an office in Singapore that plans to invest in Singapore, Indonesia and Vietnam. Why do you think U.S. investors are attracted to Southeast Asian countries?

One major factor is ease of doing business. Singapore for example is typically ranked at or near the top of global ease-of-doing business rankings, and it’s close to many large emerging economies. It’s also a first-world country and an incredible place to live.

Southeast Asia is also attractive because of its emerging middle class and sizable populations, along with less competition for deals relative to more traditional markets. All of these factors together represent a huge opportunity for investors.

Have you noticed any significant recent trends in the types of industries that are attracting investors?

We are definitely seeing a trend towards green investing, typically green backed by tech. There are some really interesting innovative products out there that leverage tech to provide impactful green products.

Do you find that VC investors are investing in companies at an earlier or later stage than in previous years?

We are seeing VCs invest earlier and earlier. As the market heats up and competition to get into certain companies increases, we are seeing VCs take smaller stakes earlier than ever. They may do this across multiple, very early-stage companies in the hope that one of them will succeed.

A Pitchbook report released this month found that VC investments committed to female-founded startups have grown more than eight times in the last decade. Have you seen this trend reflected in the Asian market?

We are seeing an increase in female founders, but it remains still by far a small portion of the market. However, with every step and with every success these numbers are growing!

What’s the most memorable thing anyone’s said to you about working in the VC market?

Generally speaking, it’s memorable when they talk about their investment returns! The numbers really can be mind-boggling. We also learn a lot from the actual investments our clients make, which often give us a glimpse of the newest trends before they become widespread.

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