Understanding the business model of a portfolio company is just one element of a successful impact investing strategy in Asia, according to Valerian Fauvel (pictured above), portfolio director at Insitor Partners, a venture capital company.
To date, through two impact investing funds, the Singapore-based firm has deployed over $30 million in start-ups in Cambodia, India, and Myanmar, investing across sectors like education, healthcare, energy, and microfinance.
In an interview with Citywire Asia, Fauvel and Insitor's chief operating officer Sertac Yeltekin (pictured below) discuss the opportunities and challenges of impact investing in Asia.
IM: What’s your formula for investing?
VF & SY: Based on trial and error, we prefer making equity investments. We occasionally provide financing through loans and convertibles and support social entrepreneurs. For venture capital funds to work, we need businesses that can scale.
If you provide a loan to a young company, they are going to have to repay it. It's not the type of capital they need, so making loans to those businesses don't work. Younger companies need equity capital to scale generally.
There are also NGOs doing great work, but balancing social return with financial return may not always be an objective for many NGOs.
IM: Who invests in your funds?
VF & SY: We have four major investors including UK's CDC Group, a family office, a fund manager and an institutional investor. Today, 100% of our funding base is in Europe.
We have not tapped into the Asian investor base yet. However, we think that the new generation of investors in Asia will find the middle ground between philanthropy and looking for the highest profit.
IM: Are you in talks with private banks?
VF & SY: The trend in Southeast Asia is that banks would likely do the business that we are doing themselves. So they would rather invest directly in the companies and be co-investors with us.
IM: What’s your strategy for attracting more Asian investors?
VF & SY: Without diluting how we define impact, we can consider certain ways of increasing returns – for example, investing in financial inclusion. That might bring you better returns than other sectors, and whet the appetite of Asian investors.
IM: Which sectors hold the most promise?
VF & SY: We have given a neutral weight in our portfolio to sectors such as microfinance, education finance, housing finance, and agri-finance. But now, we can see that there are a lot of good companies emerging in all these sectors. For instance, there are many new models emerging in agri-finance, while education and housing finance are still very new and underpenetrated spaces.
IM: What are the challenges of finding good impact investments in Asia?
VF & SY: You have to understand the business model of each company as the impact investing market is not that deep. You can't always rely on the management’s prior experience and reflexes related to sectors, customer behavior etc.
There are markets such as India where we are finding many opportunities to invest in social entrepreneurship. Other Asian markets where we invest may not yet have the scale and scope of the Indian market, but overall impact investing is surely growing.
IM: Have you ever failed?
VF & SY: Only once. The company, which distributed solar power devices to off-grid regions, was liquidated last year as the management failed to reach objectives.
One of the lessons learned was that we owned a very small percentage in the company. It was too small for us to have a voice and influence the business strategy.
Secondly, a significant part of the business was in Africa. We failed to see that the share of Africa was large, and we don't know that market. If we were exposed to that fact, we would have made a decision that was better informed.
Also, the management of the team was in Australia while the core markets were India and Africa. Now we avoid management teams based outside of the core markets.
A fair amount of failures should be expected in an early stage investment strategy and is accounted for in our plans.
IM: How long does it take to make an investment?
VF & SY: From origination, until the deal is closed, it can take between six to nine months, if you're lucky and organized.
The part that takes the longest time is the legal work around the deal, but the market is getting more intermediated. There are more investment banks, legal offices and tax analysts coming in so you can structure the deals much faster.
IM: What are your plans for 2019?
VF & SY: In the past few years, we have exited four investments from the seed fund. Now, we are looking to exit two investments that were made before 2012. We invested more than $1 million in both firms, and we own more than 20% of each. One company has grown 20-fold, and the other is delivering $200,000 in revenues per month from what was initially zero.
We are also looking at launching a third fund, and we definitely want to open up that fund to Asian investors and get some on board.
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