(DealStreetAsia) — A few days after Hong Kong scrapped its long-standing Covid-19 mask mandate on March 1, Kenneth Lai flew back to the city from a four-day business trip in the Middle East with a new mission to share with his team.
The founder of Payment Asia, a Hong Kong-based electronic payments solution provider catering to both Asia's SMEs and multinational companies, had charted a plan to take his business to the Middle East by the second quarter of 2023 by setting up an office in Dubai.
His decision came after a year of multiple trips to the Middle East, meeting with local governments, banks, and potential partners, many of whom are "good listeners" and "friendly" policymakers who have shored up his confidence.
"We are expanding our footprint as [post-Covid] normalcy returns. Dubai, for sure, will be a frequent visit location for the Payment Asia team," said Lai, who is planning to build a team of five to 10 people in the Gulf city in the next 12 months as authorities in both Hong Kong and the Chinese mainland continue to boost economic ties with the region. Payment Asia, which has delivered online and mobile payment solutions to over 10,000 merchants largely in Asia since its inception in 1999, may also look for opportunities to invest in local startups in the Middle East through the Dubai entity.
Earlier, the firm participated in a $40-million Series A round in Hong Kong-based fintech startup Reap in October 2022. It is also an investor in Aigens, a Hong Kong-based provider of online ordering and marketing tools to the Malaysia.
Businesses like Payment Asia, which have already established a presence in Asia, especially China, may find that a foray into the Middle East makes more sense given the slowdown, high inflation, and interest rate hikes in Europe and the U.S.
As geopolitical risks continue to weigh on capital flows between the world's two largest economies, the Middle East has emerged as a more ideal location for business expansion and fundraising by entrepreneurs and investors in Greater China.
On top of that, recent high-profile visits by China's leader Xi Jinping in December and Hong Kong Chief Executive John Lee last month in attempts to forge closer connections in business and investment have also offered assurance of political tailwinds.
Deep pool of oil money
Sovereign wealth funds in the oil- and gas-rich region have shown great interest in China.
In February, Saudi Arabia's Public Investment Fund (PIF) bought a stake worth $265 million in Tencent-backed Chinese e-sports company VSPO to become the firm's single largest equity holder, as the kingdom continues its push in the gaming market. The sovereign wealth fund was also the first in the Middle East to partner with the local government in southern China's Shenzhen in the launch of a $1-billion-plus private equity fund in January for investments in the city's industries like new energy and health care.
The Qatar Investment Authority, the sovereign wealth fund of the State of Qatar, co-led a $45-million Series B1 funding round in Qiming-backed Chinese pharmaceutical firm Oricell Therapeutics in February. It previously backed venture rounds in biotherapeutics firm Transcenta, electric carmaker XPeng, online lender Lufax, and the once high-flying online tutoring startup Zuoyebang before Beijing's crackdown on private tutoring.
Opportunity for fund managers
In addition to startup financing, the deep capital pool in the Middle East also presents opportunities for fund managers to find new sources of capital amid Beijing's trade frictions with Washington that have dampened U.S. investors' appetite for Chinese investments.
Family offices in the Middle East have demonstrated strong confidence in China, with 63% of respondents to a Preqin report citing China as presenting one of the best opportunities.
The Preqin report shows that at least four family offices in the Middle East have exposure to Greater China, with capital commitments to approximately 15 funds. In comparison, at least six sovereign wealth funds in the region have committed to about 21 funds with a Greater China focus.
Investors in the Middle East are sitting on "a lot of oil cash" and looking to invest in "blue-chip companies" and "well-established fund managers," said Phillip Lord, co-founder and managing partner of Pimlico Partners. The firm runs an investor relations business that helps growth- and late-stage companies raise capital and expand in the Middle East.
"It is a much more open field for Asian fund managers and Asian deals to raise money," said Lord, particularly for those from China amid the expanding use of yuan for oil trading in the Middle East.
His team at Pimlico Partners, which has helped over 50 clients from North America, Europe, and Australia expand their businesses in the Middle East, saw rising Middle East interest in investing in industries such as AI, gaming, green technology, consumer technology, and blockchain.
Abu Dhabi artificial intelligence (AI) firm G42's $10-billion technology fund reportedly appointed Jason Hu, who was previously head of strategic investments at Chinese e-commerce giant JD.com, this month to lead its Shanghai office. G42 is part of a business empire overseen by its chair Sheikh Tahnoon bin Zayed al-Nahyan, who is also the national security adviser of the United Arab Emirates (UAE).
In Saudi Arabia, businesses across the country's Vision 2030 industries like health care, new energy, urban development, tourism, education, and culture will also find themselves in a good position as the nation offers favorable policies and attractive subsidies to rope in such companies and diversify its oil-dependent economy.
"The Middle East has always invested in China, but it is being scaled up," said Lord, adding that some of the driving forces include China's increasing oil demand and cheap asset prices.
An uphill battle to win in logistics
A handful of forerunners have made a dent in the Middle Eastern market in recent years. J&T Express, a global courier services firm led by former executives of Chinese smartphone brand Oppo, has built a sizeable team in the Middle East just over one year after it started official operations in the region.
The courier company, which was founded in Indonesia in 2015 and began serving the Middle East market in early 2022, now employs almost 2,000 people in Saudi Arabia and over 700 people in the UAE.
In December of the same year, J&T named the world-renowned soccer superstar Lionel Messi as its first global brand ambassador, as the company founders Jet Lee and Tony Chen doubled down on the firm's expansion worldwide.
To Sean Xiao, who leads J&T's business in the Middle East, "a long-term strategic plan, a strong management team, as well as a self-built, reliable delivery network" are some of the keys to winning in the local market.
J&T is fighting an uphill battle in the Middle East where the competition is heating up with many of its local and foreign rivals — from Amazon and Dubai-listed Aramex to Chinese players such as SF Express, STO Express, and JD Logistics — raising their stakes in the region to cash in on the booming e-commerce industry.
The e-commerce market in the Middle East is projected to reach $49 billion by 2025 — versus $31.7 billion in 2021 — driven by the region's growing internet penetration, rising incomes, and high possessions of smartphones, according to a joint report from market researcher Euromonitor International and EZDubai, a regional e-commerce hub in Dubai South. The past few years of the global pandemic outbreak further contributed to the accelerated adoption of online shopping and digital payments.
"The growth rate of the e-commerce market size in the Middle East is approximately 7% per year. However, this could change in the second half of 2023 or next year when a handful of Chinese e-commerce giants are widely anticipated to build their presence in the region," said Xiao, who counts eWTP Arabia Capital, a venture capital firm backed by China's Alibaba Group and Saudi Arabia's PIF, as an investor of J&T in the Middle East.
In face of heightened competition, Xiao stressed the importance of a long-term plan for growing a business in an asset-heavy industry. "Many courier companies, including some Chinese players, are reluctant to invest in infrastructure. These companies largely rely on third-party resources to tap into the market. This may have resulted in cost savings at the start, but the lack of good infrastructure to a courier business is akin to building a house on a weak foundation."
As of now, J&T has extended its network across 13 countries including Indonesia, Vietnam, Malaysia, the Philippines, Thailand, Cambodia, Singapore, China, Saudi Arabia, the UAE, Mexico, Brazil, and Egypt.
The firm is said to be eyeing an IPO in Hong Kong in the second half of 2023 that could raise at least $1 billion, Reuters reported in February, citing people familiar with the matter. A Bloomberg report in February 2022 said that the firm had secured $2 billion in its latest funding round from investors including Temasek Holdings, Hillhouse Capital Group, Boyu Capital, and Sequoia Capital China.
J&T declined to comment on the news about its fundraising and IPO updates.
An easy race for AI biotech
While the fierce competition for a larger stake in the Middle Eastern logistics and infrastructure space continues, local investors' appetite for more advanced technologies, such as AI-powered drug discovery, has reached a new high for the lack of homegrown equivalents.
This is particularly the case for industry champions like Insilico Medicine, which forayed into the Middle East earlier this year with the launch of the largest AI-powered biotech R&D centre in the UAE.
The Hong Kong-based AI drug discovery unicorn officially opened a new R&D center in Abu Dhabi this February to leverage generative AI and quantum computing for biotech advancement. Later in the same month, it sealed a partnership with oil giant Saudi Aramco to develop sustainable fuels and enhance the longevity of materials.
Its latest partnership with Aramco came on top of its $95-million Series D2 round in August 2022, in which Prosperity7, the Aramco-backed diversified growth fund, acted as a lead investor.
As there is little competition in developing AI-powered biotech in the Middle East, Alex Zhavoronkov, Insilico's founder and co-CEO, considers the region a desirable place for Insilico's business expansion and future fundraising.
Although he is not able to disclose more detailed fundraising plans, Zhavoronkov said that the level of interest in Insilico is "very high." With more global biotech funds increasingly looking at the Middle East as "a source of capital," the firm's local presence could also help it tap international funds coming to raise money from this market.
Investors in the region want to invest in "possibly exponential technologies that can provide bigger returns than oil," said Zhavoronkov. "We need to take advantage of that and ensure our dominant role not only in established geographies but also across emerging economies."
Already with a long list of top-notch investors including Warburg Pincus, Sequoia Capital China, Qiming Venture Partners, and Lilly Asia Ventures, Insilico saw local governments across the Middle East spare no effort to bring in top talents and companies in the AI-enabled biotech sector.
The government in Abu Dhabi, for example, offers "phenomenon and probably some of the world's greatest benefits" to AI talents, including its zero personal income tax, which are "too good to pass" for talent-hungry companies, said Zhavoronkov.
Moving forward, Insilico is also open to potential investment and business collaboration opportunities in other Middle Eastern countries including Qatar and Oman.
Cashing in on policy-driven growth
In addition to growth-stage companies, emerging startups have also spotted opportunities in bringing their products and solutions to the Middle East, with two of the major upsides being the region's carbon-neutral efforts and friendly relations with China.
"For 100%, they [investors in the Middle East] are putting more money than ever before into clean tech, property tech, sustainability, and other ESG-related industries," said Arthur Lam, co-founder and CEO of Hong Kong-headquartered startup Negawatt Utility. He added that the investment enthusiasm is coming from all parties including sovereign wealth funds, family offices, and large-scale corporates.
Under Hong Kong's Chief Executive John Lee, Negawatt signed a memorandum of understanding (MoU) in early February with Masdar City, a carbon-neutral city in Abu Dhabi backed by the Emirati state-owned Mubadala Investment Company, to provide the city with its artificial intelligence of things (AIoT)-based property technology and smart city solutions.
The startup was a member of the delegation led by the chief executive on his week-long work trip to the Middle East.
As Negawatt is looking to lay out the details of its cooperation with Masdar City in the next three to six months, Lam said that the collaboration with a local government-backed entity offers more ease in the process. "At the end of the day, we want to know if whatever we're doing is in the right direction for the country's development."
Lam is of the view that the Middle East is now at the front line of driving the global ESG trend and that the region's good relations with the governments in Greater China ensure a stable cross-border business environment.
Lam said that business expansion in some industries is usually "interconnected" with policy-driven initiatives across certain markets. "You would want to be politically correct."
Having secured a few million U.S. dollars in a Series Pre-A round in 2022, Negawatt is now in the market raising its Series A financing. The new round could be completed in the next three to six months, potentially with investments from strategic investors in the Middle East.
