Asian Markets: The role of Venture Capital and Private Equity

What’s the role of private equity and venture capital in impact investment in Asia? What does the impact investment landscape look like in the region today? What are the key learnings from Insitor Partners in impact investing, where financial return is as important as social impact?

Impact investing in this context reflects “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return,” as Vanina Farber explains.

Professor Vanina Farber hosts Sertac Yeltekin, Senior Advisor and COO of Insitor. A Singapore-based venture capital firm, Insitor specializes in impact investment in South and Southeast Asia, predominantly India, Pakistan, Myanmar and Cambodia.

The founders of Insitor began the firm ten years ago with a clear purpose: to deploy private capital to small and medium-sized enterprises that create access to life-improving goods and services for underserved populations. “We focus on a number of sectors, which are wide enough to cover pretty much all the basic needs of a population ranging from: affordable housing, financial inclusion, microfinance, affordable healthcare, utilities (such as clean water and clean energy), education and agriculture,” says Sertac Yeltekin. The aim is to focus on growth-oriented, early-stage companies; those that are beyond start-up phase and have begun to generate revenues.

“Over the years, we’ve weeded out 400-500 companies and we have an investment process involving various stages in which we examine the companies that can be shortlisted. Even in the four countries where we’re currently working, there are potentially thousands of early-stage companies that would fit our portfolio specifications,” says Sertac Yeltekin, indicating there’s a good pipeline of investment opportunities.

On the social impact economy landscape in Asia, Sertac Yeltekin outlines “We don’t have ‘one Asia’. Asia is actually ‘Asias’”. We are talking about four or five different ecosystems; really large entities. Some of them are very advanced. For example, India has an incredibly dynamic social economy. There are about 3.5 million NGOs in India alone, about 2 million social enterprises and about 2 to 4 million enterprises that can be considered being within the social impact sphere.”

Sertac Yeltekin also outlines Insitor’s exit and return strategy. As a finance-first impact investor, Insitor is not only looking for social impact but also financial return. At Insitor Sertac Yeltekin explains “as a team, we look at companies that can yield over time and be sustainable. The market expectations around returns is between 10-15% rate of return per annum, with a net return of 6-7%. These are hefty returns. The bar is really high.”

Speaking to the exit opportunities available, Insitor investments have not IPO’d in public markets. “They’re basically a buyout from global medical company. Another one is a secondary buyout so current shareholders are not listed companies and buy out the shares of other investors. There are also management buy outs.” Vanina Farber cites the discussions she is having in Switzerland around the creation of a “social stock exchange” because it is a challenge for social impact enterprises to “go public” and intimates this is a space worth exploring.

Vanina Farber and Sertac Yeltekin also unpack the effects of the current COVID-19 crisis on fundraising. “Fundraising is very labor intensive with one-to-one contact with investors. If investors cannot go and see your operations and cannot complete their due diligence, there is going to be disruption,” says Serac Yeltekin.

He also explains the presence of “dry powder” money, which is money that is committed but has not yet been deployed. Dry powder can sometimes be deployed for follow-on investments or current investments and he predicts that it is most likely going to be used to shore up defences for these companies.

Yeltekin estimates there will be one or two years to come of a rough market in impact investing in Asia due to the COVID-19 crisis.

Sertac Yeltekin explains that with 80% of impact investors located in the North America and Europe, “there’s a huge deficit of Asian investors actually supporting Asian investments. And that is a structural issue and it’s the way the venture capital world also operates. Start-ups and early stage enterprises are often considered ‘speculative investments’ for Asian investors. There is a lot of philanthropic money around in Asia. There are about 9 or 10 million people with an income level of above $1 million in the region. But they don’t want to mix philanthropic money with impact investing.”

“For impact investment [in Asia], there has to be a robust storyline and there has to be a return. And the return is very, very important,” says Sertac Yeltekin. To exemplify this approach, Sertac Yeltekin tells the story of a friend who turned to Southeast Asian investors for his Swiss EdTech start-up and was told there were two rules to obtaining investment: (1) you’re not going to lose any money and (2) you’re not going to lose any money!

“The impact investment community and those who want to get into this space need a very compelling story and have to show value. You can’t rely on goodwill.” He says that this approach is much more prevalent in Asia and it’s often derived from conservative ways of managing family money.

Although the Asian impact investment ecosystem is maturing, growth is uneven and impact investment remains less developed compared to the rest of the world. To this end, as a society, we need develop the ecosystem, raise awareness and groom future social entrepreneurs. The experience of Insitor illustrates that opportunities exist for a wide range of investors looking to blend financial returns and social impact.

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