Rapid growth in the technology sector
Southeast Asia’s (SEA) internet economy is expected to reach US$363 billion by 2025, growing more than 100% from US$170 billion in 20211 and on the way to a US$1 trillion economy in 2030. COVID-19 has accelerated digital transformation and online spending. Share of the technology sector in PE/VC2 investment in 2021 for Singapore, Malaysia and Indonesia was 64%3, an increase from the single-digit percentages of a few years ago. The region was home to 42 unicorns as of December 2021, 75% of which achieved unicorn status in the last 3 years and over 50% did so in 20214 himself. While a few have successfully gone public or merged with public companies, several are actively seeking US or SEA listings, either directly or through PSPC.5 Vehicles. The year 2021 was marked by significant de-SPAC transactions from Southeast Asia, valued at US$59 billion. There have also been many SEA-based investors and sponsors who have SPACs listed or listed in the US and many are vying for Singapore’s attractive SPAC regime. These facts and trends illustrate the transformation of SEA from a tangible asset-based economy a decade ago (focused on real estate, shipping, energy and retail) to a intangibles in the recent past, with an increased push on fintech, e-commerce, logistics to support e-commerce, online marketplaces and other internet-led businesses.
Exit options urgently needed
Between 2018 and 2021, there were over 600 PE/VC investments in the tech sector in Singapore, Malaysia and Indonesia, valued at over US$31 billion6. Therefore, it is not surprising that there is a significant need for exit options for investors in the immediate or near future and that there are a large number of companies that would need to seek quotes, SPAC deletion agreements, commercial sales or mergers. With over 100¬200 investments each year, but only a handful of exits so far, and a typical investment holding cycle of 4-7 years, we envision several hundred investments that will target the capital market or transactions in the immediate future.
Assessment Requirements and Challenges
The need for valuations to support these outflows as well as the continued growth of the industry cannot be underestimated. Such assessments tend to be very complicated and difficult, given that the technology industry is complex and constantly reinventing itself; many of these companies envision strong growth in disruptive businesses focused on game-changing business models; and many of these businesses are in a pre-profit stage. Although the valuations of a capital market or M&A transaction are likely to be determined by market participants such as shareholders, tier-one investors and underwriters, there is still a critical need for independent professional valuation that would support these transactions, both directly and indirectly.
Start-up and growing companies, which are typically cash-intensive, tend to reward their employees and management through equity compensation through Employee Stock Option Programs (ESOS), restricted stock units (RSU), etc. These share-based payments are required to be measured at fair value in accordance with IFRS or other equivalent global/local accounting standard, and this value is to be amortized over a period of time. This would generally require a valuation of the underlying shares such as common stock, which would be different from the value of any preferred stock issued in a recent transaction, and a valuation of options, if applicable.
It is also common for these companies to issue optionally convertible preferred stock, convertible debt securities, warrants, etc. to investors, and accounting standards require that these financial instruments be measured at fair value.
Since many well-funded technology companies have also grown through acquisitions, they require a valuation of all tangible and intangible assets and liabilities (both on- and off-balance sheet) for purchase price allocation purposes. In addition, an assessment of any non-cash payments and earn-outs should be made. After such business combinations, goodwill and all recognized long-lived assets must be tested for impairment on an annual basis or when there is a trigger.
While these are common requirements under accounting standards, they are not necessarily fully met, due to the nature of startups, high demands, and limited bandwidth available to management teams. As companies grow, more sophisticated investors, and companies retain auditors with deeper expertise in fair value accounting, there will be a willingness to seek help from valuation professionals. to support the restatement of financial statements, to proceed with any capital market initiatives.
Specific assessment requirements during SPAC and De-SPAC
In addition to the financial reporting requirements described previously, there are other specific valuation requirements in a SPAC situation. Instruments created in a SPAC include public shares, which include public shares (Class A) and public warrants. SPAC Sponsors receive Founder Shares (Class B) and Private Warrants. The warrants are detachable after a certain period of time, and they can be exercised or redeemed, subject to certain conditions. In accordance with accounting standards, these warrants must be treated as a liability and therefore their fair value is determined on the books of SPAC at the time of the IPO and at each closing date until the ex-dividend date. The valuation would generally be made based on various option pricing models.
Similarly, the fair value of founder shares and private warrants must be determined on the books of the sponsor. The valuation of Class B shares will be made based on the data of the price of Class A shares, the probability that SPAC will achieve a successful initial business combination (IBC or De-SPAC), the expected time for it- here and of any contractual blocking period. The valuation of the private warrants will follow a similar approach based on input from the traded price of the public warrants and other assumptions about the business combination.
At the time of the IBC, the fair valuation of the target must be determined. For some SPAC plans, the responsibility rests solely with the board of directors. Boards of directors may require an independent professional valuation to support the IBC transaction. In some situations, the board may need a fairness opinion, if there is a stakeholder angle. For some SPAC schemes like Singapore, an independent assessment is required for the IBC when there is no PIPE7 investment before the IBC.
Other assessment requirement
As technology companies and their investors in SEA explore exit options, including global listings or mergers and acquisitions, they may need to make certain changes to company ownership and tax structures to facilitate these processes or transactions. of quotation. This could involve tax valuation or transfer pricing of legal entities, assets or liabilities, depending on the nature of the structure and the jurisdiction.
Engage appropriate experts
It is essential that corporate boards and management engage appropriate valuation professionals who are experienced in evaluating ever-changing technology business models and highly complex financial instruments with an understanding thorough review of the strict requirements of regulators as well as accounting and valuation standards. Thus, it is important to select the appropriate assessment professional with the right qualification, certification and affiliation to the VPO8, which places significant importance on maintaining the quality of the profession and continuing professional development. While the valuation will continue to have elements of subjectivity, it is of the utmost importance that this subjectivity is supported by in-depth experience, informed judgment and adherence to best practices, standards and governance.
1e-Conomy SEA 2021 Report by Google, Temasek, Bain & Company
2Private Equity / Venture Capital
3Kroll – Duff & Phelps Transaction Tracking Report, 2021
5Special Purpose Acquisition Companies
6Kroll – Duff & Phelps Transaction Tracking Reports
7Private investment in public capital