From a gallop to a canter: tech investment in Asia

June 2023  |  FEATURE | SECTOR ANALYSIS

Financier Worldwide Magazine

June 2023 Issue

Fast solidifying its reputation as the innovation hub for the world, tech investment in Asia has grown steadily since 2017 and now represents the majority of private capital activity in the region.

Indeed, Asian countries, and across China, India and Southeast Asia in particular, have been experiencing an enormous technological transformation – digital payments, 5G adoption, infrastructure, smartphone penetration and a vision of Society 5.0.

Moreover, this digital transformation – which can be seen in a range of industries including e-commerce, financial services, manufacturing, transportation and healthcare – has expanded the region’s infrastructure and technological capabilities, making both economic progress and rapid strides in human development, literacy and innovation.

According to research by the McKinsey Global Institute (MGI), over the last decade Asia, which is home to more than half the world’s population, has accounted for 52 percent of global growth in tech-company revenues, 43 percent of startup funding and 51 percent of spending on research and development.

“Asia has experienced a significant technological transformation over the past decade,” attests McKinsey. “The region has developed and deepened its technological capabilities and infrastructure rapidly, accounting for a large share of global growth in technology company revenue start-up funding, spending on R&D, and patents filed.”

In concurrence, in its 2023 ‘Emerging Tech Trends in Asia’ report, the Global Private Capital Association (GPCA) states that the momentum the tech scene in Asia has gained over the last 10 years is due to two key factors: increasing smartphone penetration rates and the digitalisation of traditional businesses.

“The former drove the expansion of e-commerce and consumer digital platforms, while the latter further spurred the growth of data centres, digital infrastructure, enterprise software and services,” says Jeff Schlapinski, managing director of research at the GPCA. “Both trends predate coronavirus (COVID-19), but the pandemic supercharged them. Coupled with low interest rates and ample dry powder in private equity (PE) and venture capital (VC) funds, technology investment boomed across all geographies in 2021.

“We have since entered a period where funding has slowed, and valuations are correcting,” he continues. “Nonetheless, tech deals still accounted for 69 percent of all private capital investment in Asia in 2022.”

Investment share

The pace of technology innovation and adoption by Asian companies and consumers is outstripping many other regions. Large-scale infrastructure investments are the platform for the next generation of digital innovation across Asia.

According to the GPCA report, Asia has deepened its technological capabilities in recent years, with notable investment activity being seen in China, India and Southeast Asia especially.

Investment activity has shifted decisively toward deep tech in China, which accounted for 71 percent of tech deal value in 2022. In addition, the country’s biotech, semiconductor and electric vehicles (EV) markets are benefitting from regulatory shifts and growing investment from local and international investors alike.

Although investment in consumer tech and FinTech has declined from 2021 highs, EVs have emerged as a key area of investment in India, with strong support from the government providing a boost. Moreover, India is looking to accelerate its EV industry via tax cuts and subsidies to reach 30 percent penetration by 2030.

From explosive e-commerce growth that achieved record-breaking gross merchandise value rates ($74bn in 2020 almost doubling to $120bn in 2022) to accelerated progress in digital finance, Southeast Asia is living up to expectations as a regional tech hotbed.

“Investment varies substantially across geographies,” observes Mr Schlapinski. “In China, we have witnessed a rapid shift toward areas like biotech, semiconductors, EVs and robotics in response to antitrust actions and policy changes discouraging consumer tech platforms such as e-commerce, payments and FinTech and EdTech, among others.

“In India and Southeast Asia, FinTech and e-commerce still predominate, with other sectors also growing as the ecosystem matures,” he continues. “In 2022, Indian EV companies raised a record $1.5bn from private capital investors. HealthTech and AgTech are also growing in both Southeast Asia and India.”

Continued growth?

Despite the global and regional headwinds, the tech scene in Asia appears well-positioned for continued growth, with Asian companies prioritising and exploring emerging technologies.

“Based on conversations with investors in the region, we are going to experience a period of slower investment activity in the near term as valuations adjust and existing startups streamline operations,” suggests Mr Schlapinski. “This is a result of the new global environment of higher interest rates, economic uncertainty and public markets volatility.

“In contrast, the longer term looks very positive,” he concludes. “Structural drivers of the region’s growth – demographics, digital adoption and rising incomes – remain unchanged. Moreover, a whole crop of new tech-focused fund managers has emerged across the region over the last decade with capital to deploy and a front-row seat to identify the next wave of growth.”

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BY

Fraser Tennant