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Random and unfiltered thoughts over the last two weeks


 

Competitive rivalry


A lot of professionals in the venture capital and mid-cap private equity space seem to be bad-mouthing each other. I attribute this to two reasons: Either a misplaced sense of pride or the intense competition in fundraising.


 

The state of venture capital


Venture capital investing looks like a game of ego. Every week I see numerous congratulatory posts relating to successful investments or fundraises on LinkedIn. It's all good. But a lot of folks seem to be either ignoring or oblivious to the long line of investors that has silently accumulated over the years and who are now queueing up for the exit.


Someone recently told me that the DPI (distribution to paid-in) for VCs in Southeast Asia had apparently been only four percent in the last ten years.


If we assume 2014 as the vintage year for which hot LP money started to pour into Asia and an average fund life of 10 years, this would indicate that the harvesting period has come due. But the hearsay of 4% DPI would suggest that 96% of capital deployed is still stuck, waiting to be sold, written down or written off.


I haven’t been able to verify this.


A lot of wealth is sitting in this part of the world[1]. Yet at the same time, a lot of VC money also wants to get out. Those who put their capital to work 7 to 10 years ago in early stage ventures are still waiting for their payday.


GPs and founders face an incredibly tricky job of having to re-direct this flow of money somewhere, or to someone else, just to avoid a meltdown of the startup ecosystem and perhaps more importantly, repercussion from the broader investor community.


Maybe they aren't really clueless. They just don't want to look bad by admitting that valuations had been overstretched in the earlier rounds of fundraising.


 

Recession in China


China is probably already in a recession - a contraction in economic growth, decreasing FDI flows, and stark unemployment. The financial behemoths such as JPMorgan, UBS and Nomura had also ‘downgraded’ China equities recently.


Of course no one is publicly admitting it yet, because no one can verify the data and information[2]. But let’s not rock the boat now…


The smoking gun here are the unemployment rates in Shenzhen, one of the country's core economic engines. I don’t see the economy getting better, not at least in the near term.


The balance sheets of individuals first need to be fixed before companies can be fixed. That means prioritising job creation, spurring disposable incomes and sustainable consumption.

The upcoming Single’s Day sales in November will be a bellwether for things to come.


 

Tech jobs in China

Many youths in China are retreating to the countryside in search of jobs and a more meaningful pace of life. The economy seems to be backtracking on being an innovation and manufacturing powerhouse, and losing ground as one of the go-to destinations for business expansion.


A documentary on CNA reveals the state of affairs in some of the leading tech giants:

"Everything that could be done has already been done. At this point, the work mostly involves minor fixes. Or we repeatedly work on the same functionalities. You might create one version today, then scrap it and create another version tomorrow, with only very subtle differences between the two. The improvements might be minimal or even negative. That’s the kind of work we are doing now. It feels like there are over a dozen teams all working to enhance and fix a small issue. How much significance does that really have?” - a tech professional-turned-farmer in China

 

Founder's mentality


One thing that founders dislike more than incompetency is hearing that “it can’t be done.”


 

"Potato, potahto."


Wealth is created both by selling hot potatoes and selling 'hot potatoes'. You make money by either selling products or selling stories. It is easy to get carried away by confusing stories with products.


 

The work of bankers


Most of the bankers I meet today don’t know the half of what they are talking about (sorry if this offends).


Whether it is wealth management products or advising on strategic decisions involving raising capital, bankers ain't got a clue.


They mostly talk about the general market sentiment at meetings (nothing that is not already in the news), talk about corporate strategies using different words, and then take a slice from the proceeds of the fundraising.


Aside from the infrastructure backbone that banks provide to facilitate huge flows of capital, the proprietary insights and value-add in arranging investor meetings seem to be either marginalised by fact that companies themselves can get access directly to the investors, or are otherwise non-existent.


I would run deals very differently if I ever went back into banking...


 

A pipe dream


Getting listed on the SGX looks increasingly like a pipe dream.


As much as regulators and industry groups have committed to spending the next 12 months discussing the way forward, there are some very fundamental issues that needs to be addressed, listing costs being only one of the factors.


Following roughly two decades of successful REIT listings, investors trading on the SGX have gotten used to yields. Anything that doesn’t sound remotely like a fixed income product just isn’t attractive.


Companies that raise capital via issuing new shares in Singapore simply do not offer the same outsized returns investors can be getting in other high growth markets and structured investments.


The biggest selling point for any stock exchange therefore is liquidity. To solve for this, the 'tap' needs to be flowing. A cut in interest rates to “push” money from safe havens out into the open seems like one of the most direct way to solve for this.


Beyond institutional participation, we need punters, speculators, aunties and uncles. Singapore already has the Sands and RWS casinos. For what it is worth, we now need to turn our exchange into a vibrant online marketplace that allows people to make 'bets' on the shares of companies.


I use the word 'bet' loosely: When retail investors trade shares, we consider them to be punting. But when an institution trades, we say that they 'invest'. We use the proverbial labels "stupid money" and "smart money" to describe the two.


The stereotype here is that the market believes risk can be assessed and quantified using statistical and mathematical models, accessible by "accredited" investors. When something goes wrong, it's bad judgement on the part of institutional investors, but comes off as gambling for retail investors.


A proper functioning stock market requires the participation of both retail and institutions - that is why the exchange mandates publicly traded shares to be in the hands of at least 500 shareholders. Regulators and stock exchanges around the world can't say this, but the reality is "smart" money needs "stupid" money to create liquidity. The sophisticated models and assessment of returns that we 'worship' so much are built on a large stochastic universe of individual investors.


In order to galvanise liquidity, greed, at this point, seems to be good.


 

Selfish interests


Everyone has their own selfish interests at the deal table whether it is running a $100,000 company or a billion dollar company. It is always the same: Everyone thinks they know it all, everyone wants you to listen to them, to do things their way, and to top it off, some even want your money.


 

Clarity is king


When looking back on my professional career over nearly two decades, I realised that most of my younger days were characterised by long hours of churning models and slides with very little time for critical thinking and in-depth analysis. This proportion changed over the years of course, but I wished that I had spent more time thinking and synthesising ideas.


The clarity of mind, even when you are not doing anything, is always better than blind productivity.


 

How to legitimately lose money


A lot of people don't realise that the covenants involving raising equity are very different from debt.


The science around risk-reward for both equity and debt is well documented.


Equity holders are generally willing to risk all their capital in exchange for a share in future profits, while most debt holders prioritise capital preservation in exchange for lower returns.


Both involve an obligation by the parties involved to perform, or not to do certain things, but fundamentally with debt, there is an implicit expectation that the investment can, and will almost always be recovered.


It pays to keep this in mind when contemplating any investment: Companies and founders who are asking you to invest equity (as compared to a loan) are not just trying to up-sell you on the huge returns, they are also asking your permission to legitimately lose that money.



 

[1] McKinsey also has an interesting report that details this flow of capital to Singapore particularly from family offices: https://www.mckinsey.com/industries/financial-services/our-insights/asia-pacifics-family-office-boom-opportunity-knocks

[2] The Economist: “The Chinese authorities are concealing the state of the economy“, https://www.economist.com/briefing/2024/09/05/the-chinese-authorities-are-concealing-the-state-of-the-economy

Wed, Sep 11, 2024 |

by Kenny NG
@kennyngbc

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