Local investors support surge in Asian impact investing
Asia has been the world’s fastest growing region for impact investing over the past five years, in part because wealthy families in the region are getting more involved. But a lack of market development, access to smaller-scale projects or local investor networks is stymieing faster expansion, according to a report from Global Impact Investment Network.
The report, entitled The Landscape of Impact Investing in Southeast Asia, published on Wednesday, studied the impact investing market from 2007 to 2017. It particularly focused on Vietnam, Indonesia and the Philippines, which account for over 60% of capital deployed to date in the region (see chart below).
Investors making impact investments in development projects seek to make a positive social and environmental effect while getting a financial return, in contrast to pure philanthropy.
The report notes that private impact investors (PIIs), which include non-government funded groups, have deployed $904 million through 225 direct deals since 2007. In addition, development finance institutions such as the International Finance Corporation have deployed $11.3 billion through 289 direct deals.
For both sets of investors, investment activity has increased markedly; more than 75% of deals and 80% of capital has been deployed since 2013. Encouragingly, regional investors are behind more of this activity.
“Historically, most capital for impact investing in the region has originated from investors in North America or Western Europe. A particularly promising trend is the growing participation of local investors, led by wealthy families and high net-worth individuals,” said Abhilash Mudaliar, research director at GIIN.
While most local investors still prefer philanthropy to achieve social and environmental goals, wealthy individuals and family offices in countries such as Indonesia, the Philippines and Thailand are using impact investing to do so.
“Many are currently involved in grant-making and want to improve the accountability and sustainability of their philanthropy. Such capital could be leveraged either directly for impact investing or by designing hybrid capital models to increase the risk appetite of PIIs already active in the region,” said Mudaliar.
Adeline Tan, head of advisory at Mercer in Hong Kong, told AsianInvestor she was seeing more families look to impact investing because all family members could comment on and contribute towards the final goal.
One example is Cambodia, where private investors have taken advantage of a relatively open, dollarised economy to develop its microfinance sector, said the report. As a result, Cambodia has attracted nearly as much PII capital as Indonesia, the Philippines and Vietnam combined. Laos, Myanmar, Thailand, Malaysia and East Timor have all had comparatively less PII activity.
The top three impact investment sectors in Asia are financial services, energy and manufacturing. The former received roughly 60% of all deployed PII capital, with 80% of this being deployed to microfinance institutions. There is also growing activity in education, healthcare, and workforce development.
INVESTING CONSTRAINTS
Despite these positive developments, the report notes that a combination of the emerging nature of many Southeast Asian economies, administrative roadblocks and a lack of proper governance is constraining the potential of impact investing.
This is particularly true at the seeding level, where smaller family investors are more likely to get involved. The report states that deals below $500,000 in most countries are rare, with most PIIs investing into deals larger than $1 million. Since most investors have no local presence, the investment process is expensive. This leads them to defray these sourcing costs by making larger, later-stage investments.
Added to this is the scarcity of active impact-focused angel investor networks, except in Indonesia. Without such networks, most enterprises raise seed-stage capital (ranging from $100,000 to $500,000) by accessing their own resources, turning to family and friends, relying on accelerators and incubators, or seeking grants from family offices.
Tuck Meng Yee, who runs the single family office JRT Partners in Singapore, recently told AsianInvestor that investing on a small and local level was especially effective in politically unstable countries.
In Myanmar, for example, he noted his organisation wanted to help people without supporting the actions of the repressive military regime. “We are looking for people who don’t have those kind of government associations. They are typically private sector or NGOs (non-governmental organisations) and preferably local people, or locals working with foreign partners,” he said.
“You do much smaller projects because then you are less likely to have some sort of government entity coming in and trying to take a piece of the action. You work with them there from the grassroots.”
The report confirms Yee’s assertion that a local presence is important. In Indonesia, the Philippines and Vietnam, the average yearly number of deals made by investors with a local presence is almost twice that of investors without a local presence. To address this, investors based outside the region have begun to employ local talent or form partnerships with local funds, especially in Indonesia, Vietnam and Myanmar.
Impact investing in Asia is also constrained by a lack of successful investments. Most PIIs making equity investments seek market rate returns, and they expect to exit by selling to larger investors. However, only a few countries like Singapore, Thailand and Indonesia have disclosed records of exits.
“While many stakeholders have discussed expected returns, the region lacks evidence of realised returns. The lack of success stories inflates the perception of risk in the region, which often deters new investors from entering,” said Mudaliar.
Chart 1. PII activity by country
