What are the key takeaways from the event?
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Looking at the overall picture, both PE and VC had fared well against the initial impact of COVID-19, said Judy Zhang of Cambridge Associates. VC seems to be doing a little better than PE, but this was to be expected as VC is more exposed to more digital sectors. It’s also widely observed that upper quartile funds had seen negligible impact and are weathering well, while the lower quartile saw more impact – it's a sign that quality does matter in this environment.
However, it is important for us to remember that these data are only looking at the initial impact, and we don’t know how much more could come in terms of longer-term impact and length of recovery from that. We need to continue to keep communication channels open between LPs and GPs, especially information on real impact and cashflow needs etc. It is also a good time to evaluate dry power levels and to do some stress testing in case of prolonged impact from the pandemic.
But of course, it’s not all doom and gloom. Every crisis creates opportunities, and Ed Roman at Hack VC shared his insights with us on where he believes we can find these.
One of the interesting points mentioned was that COVID-19 is actually a good time to start a new company – it’s easier to hire great talent due to redundancies and the acquisition of struggling competitors allows for cheaper and faster growth. However, he cautioned, you’ll need to be in the right sectors. Some of the best sectors to be in include IT and digital, while the riskiest sectors are in travel and hospitality etc.
Our speakers generally agreed that the level of impact differs greatly depending on the sector you’re in. However, it was agreed that the Chinese market has recovered very quickly and disruption for Chinese VC was minimal.
How are the global macro uncertainties impacting the way businesses are currently run, and the investor outlook moving forward?
India The country’s economy took a large hit from COVID-19 initially, but there are signs that businesses are rebounding as they pivot themselves to be in a better position than pre-COVID periods. For India, they are watching the US-China trade tensions closely. New opportunities have arisen in the country as more investors are giving more attention to the country. The trend is positive – talents have always been available, the infrastructure and tech are being established, the flow of capital into the country is accelerating, and the quality of funds have improved dramatically.
Japan COVID-19 seemed to have limited impact in Japan when compared to many other countries. Sectors such as healthcare and some domestic services have not been affected, but retail and leisure took a strong blow. The uncertainty and volatility in consumer behaviour bring huge challenges. At this time, it is important to inform your portfolios of potential outcome projections, prepare to be more agile with decision making, and secure cash where possible. A trend observed in Japan post-COVID worth noting is the acceleration in founder succession and more exists for traditionally family-owned SMEs.
South Korea A major impact of COVID-19, like in many other countries, was that consumers stopped offline shopping and went online. For those in the online space, it meant that it was less costly to acquire additional users. This enables them to conserve the cash or use it to get more great talents out in the market and build their competitiveness. Attitude towards venture capital has changed rapidly in the country for the better, and inhibitors of innovation within current regulations are gradually being tackled. It is increasingly more profitable to invest here.
China As the first country to be hard-hit by COVID-19, China is already getting back on track. It’s important to cease the moment and become the real leaders in the market by focusing on ways to strengthen the company, as well as have another round of financing or IPO. An interesting trend observed was that companies in China are specialising as they are realising that it’s important to focus on what they’re good at to bring competitive advantage and innovation.
LP views? Asset allocation to Asia has continued to increase, with China leading the way. Despite the geopolitical challenges, LPs believe the impacts will be short-term. Southeast Asia is also an area of interest for investors, but it is important to note cultural differences, have strong on-the-ground knowledge, and make sure you do diligence.
2020 has hit economies hard worldwide, not least because of the impacts of COVID-19. Do investors still see Asia as a resilient market with growth potential?
In exploring investor appetite for the region, the answer is that Asia is still considered a growth powerhouse, and China is still leading the way. Investors in general are in favour of increased allocation over time in the Asian region, especially in the post-COVID era.
The WEF has predicted for 2020 to be the turning point where Asia Pacific will take over the rest of the world in terms of global GDP. Europe is slowing down, while US is experiencing geopolitical instability. Asia also has the advantage of having a large consumer base – especially in China.
Asia Pacific is a broad region, so investors know that you cannot paint the region with a broad brush. There is increased segmentation in opportunity sets, which influences investors’ choices in selecting for established managers or sector specific managers. The consensus is that traditionally, established managers have been the preferred option, but investors are paying more attention on emerging managers. They tend to be more aligned with investors and specialised on a geography or sector, both of which are good qualities to allow ‘fine tuning’ of investments. There is some expectation for growth in sector specific investments in this region.
It’s an important time for first time managers to be creative, show great teamwork, get some track record and develop great relationships with LPs. They need to make sure they are being seen, as more established managers with track record tend to be where investors default to in difficult times.
Overall returns in Asia has been similar to what’s seen in Europe and US, but they very different dynamics. Asia lags behind on secondaries, and due to the large number of countries in the region, currency risk is one for managers focusing on this region.
The geopolitical tensions between China and US is still one to watch for investors, and some have considered new areas to explore as a result. However, investors need to remember that different parts of Asia are very different in characteristic, so your strategy will need to change to suit them. Of course, it is also good to keep in mind that most geopolitics are short-term, and you should always remind yourself of the bigger picture.
Given the backdrop of global trade issues, slow economic growth and COVID-19 pandemic, is China still a place to invest in, and why? Our panellists looking at investment themes in China noted a number of trends they’ve observed on the ground.
First, consumer space in China has mass potential as consumption continues to increase as people become more affluent. A key demographic to watch is the Millennials and Gen-Zs as they become the major spenders in the economy – and they have much greater spending power than their parents did. Consumer tech services – especially online community-based ecommerce – has much room to grow and it’s worth keeping watch.
Social ecommerce and technology is also booming under COVID-19 pressures. Examples of this includes healthcare technologies in making diagnosis and online education video solutions. There are many new innovative solutions out there and the early stage market is getting increasingly crowded as both investors and entrepreneurs are moving in fast.
Some investors are wary of geopolitical tensions and deliberately stay away from companies and industries that are more exposed to these risks. High valuations and excess liquidity are also things to watch out for. However, a recurring message from investors this week is to focus on the long-term investment thesis and switch yourself off from short-term noises and distractions.
One of the biggest challenges brought by COVID-19 for LPs is their ability to do due diligence and building relationships with GPs. Overall, the fundraising market is slowing down but the best and biggest players are still doing well. The situation is tougher for new managers. While some are more comfortable with using video conferencing tools, most others say they don’t make decisions solely on digital interactions.
However, China in general has dealt with the pandemic well and has mostly recovered from the initial impacts, so investors are feeling confident for most parts of their portfolios, especially those in digital, online technologies and healthcare.
Helen Wong, Partner at Qiming Venture Partners
Tanya Rolfe, Managing Partner at Her Capital
Dr Kai-Fu Lee, Chairman & CEO at Sinovation Ventures
Judith Li, Partner at Lilly Asia Ventures
