Co-head of Morrison Forester’s Asia Private Equity group Thomas Chou is quoted in a recent article, “Investors keen on regional biotech, but are cautious about deal terms”, published by The Business Times.
The article explores the trends in Southeast Asian biotech funding this year, including how valuation dynamics and downside protection mechanisms are impacting new financings of Southeast Asian biopharma and medtech companies.
Thomas comments, “In the last few years, a lot of companies in this sector raised very large sums of money at very high valuations. I’ve seen several companies come back to my desk in 2020 and 2021, and their valuations would have doubled or sometimes tripled during that time.”
“It’s very hard for (these) companies to be able to accept a lower valuation, because so many of their existing investors would be underwater.”
Thomas added that flat rounds, where the valuation of the company is unchanged, are “not a bad thing” in this current market. Such rounds can be structured as an extension of the last equity round, with the pre-money valuation of the company staying the same.
“But even in these extensions, there is a lot of concern about downside risk. We are seeing, for example, more aggressive liquidation preferences; we see people asking for redemption rights with fairly broad triggers to activate such rights,” said Thomas.
In cases where the round is structured with convertible notes, investors are also requesting discounts of as much as 30 percent upon conversion, whereas the threshold would normally be set at 20 percent.