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Investing for good
OVER the past couple of years, investing for impact has gained traction, as more investors seek avenues for their investments that not only generate financial returns but also yield a social and/or environmental good.
In Singapore, a collaboration between UOB Venture Management and Credit Suisse is building on the success of its first impact fund, the Asia Impact Investment Fund (I), which raised US$55 million at its 2015 launch.
The partners are planning the launch of a second impact fund, for which they hope to raise between US$100 and150 million. Seah Kian Wee, UOBVM chief executive, is convinced that impact investments are an asset class whose time has come. "Initially, investment is about returns. In time to come, investors will look at not just risk and return, but also at impact. We do believe this is a growing asset class. Millennial and young people want to invest with purpose … We're confident, having done what we have in the first fund."
Based on definitions by the Global Impact Investment Network, an impact investment should meet three criteria: Have the intention to create a positive social or environmental impact; have an expectation of some financial return; and a commitment to measure the impact.
GIIN estimates that private investors have deployed some US$904 million in impact investments in South-east Asia in 225 direct deals between 2007 and 2017, and development financial institutions, about US$11.3 billion in 289 deals.
GIIN surveys find that most impact investors seek market returns, and the investments meet or exceed expectations. GIIN's latest 2019 survey found some US$239 billion in impact investments, half of which is allocated to emerging markets and half to developed markets.
There are a number of large impact funds, notably the US$2 billion Rise fund by TPG. Recently, Leapfrog Investments raised US$700 million for its third fund, to invest in healthcare and financial services to benefit emerging consumers in Asia and Africa.
Wealthy entrepreneurs may typically make individual investments in enterprises with a social or environmental objective. Pooling such investments into a fund gives the benefit of professional due diligence and selection of portfolio companies; systematic measurement of financial and social/environmental impacts; and regular reporting. Like any other private equity fund, there is a lock-up period.
Like AIIF (I), the second fund will focus on smaller companies in the region, where the partners believe the greatest opportunities lie. This leverages the strength of the UOB group, whose extensive presence in the Asia Pacific is expected to help open doors to promising deals.
UOBVM itself has provided financing to over 100 companies since 1992 through direct equity investment, mainly in Southeast Asia and Greater China. As at endMay, it has more than S$1.7 billion in committed capital. AIIF (II) will focus on the education, healthcare and agriculture sectors. Its mandate is defined as "double bottom line", with the twin objective of impact and financial returns.
Joost Bilkes, Credit Suisse's head of Impact Advisory and Finance Department (IAF) Asia Pacific, says: "Smaller companies is where the funding gaps are, and where the greatest opportunities lie. We needed someone extremely experienced in in that segment and who is on the ground." CS IAF team acts as impact adviser to the fund's strategy.
Mr Seah says the investment discipline of an impact fund is largely similar to that for a PE fund, but there is particular scrutiny on whether a company's business model has impact as its core strategy or a byproduct.
"You can put money into a social enterprise to help 10 families. But in our fund, we do this in a systematic, very structured way.
We apply a systematic approach to pick the best deals. With that you are able to scale in terms of impact. We're blessed because Asean and China are regions where you can really make a lot of impact."
Asia-Pacific is home to over 700 million people living under US$5.50 a day.
"We don't spend too much time with those who wrap themselves with impact but the execution doesn't live up to it. We're very selective, we want those with impact in their DNA. Those with the right DNA also size us up as they look for a partner … Our success rate has been high not because we pay the highest valuation, but because entrepreneurs feel we are authentic. We have a track record as we're among the earliest investors in Asean and China."
The partners also seek portfolio companies whose activity can generate a multiplier effect, to benefit ever larger groups of users. For instance, one of AIIF (I)'s portfolio companies is Ruangguru which offers low priced digital education content with the objective of raising the quality of education in Indonesia and reaching as many students as possible, particularly the less privileged in rural areas. To date, the firm's learning platform has benefited over 10 million students. By sharing its data it has also helped educators and government officials.
Mr Seah says: "Many deals have an impact element, but they must be able to scale and make a difference. Sometimes solving big problems is risky, but if it works the return is substantial. A company that is scalable and impactful can generate a return of more than 10 times … Ruangguru's product is offered at a cost that's one tenth of conventional private tuition."
"Ruangguru makes content so affordable and access has improved so greatly that it has become high impact. Two of our funds have invested in it, because it fits the mandate for impact and financial return ...
We track the number of students in developed cities versus remote areas. Can they afford it? We track the improvement in test scores. Now, we have enough data to say it has worked. The company is getting a lot of traction."
UOBVM is Ruangguru's single largest shareholder. AIIF (I) has also invested Halodoc, a digital healthcare platform that allows users across Indonesia to have live consultations with over 20,000 licensed doctors, anywhere anytime.
They can use the app to order lab tests and medication which can be delivered within an hour. Halodoc has tied up with Gojek to make its services available through the Gojek app. Halodoc's strategic investors including the Bill & Melinda Gates Foundation, Allianz X and Prudential.