Impact Investing in Asia

Asia has felt so far away but is less new to me now. With the help of family, friends, and gracious hosts, I learned tremendously. I breathed in secondhand smoking, met my mentors at the Asia Venture Philanthropy Network (AVPN), ate Ya Kun Kaya Toast, met with friends from Temasek a sustainability fund, and went surfing with family friends. Here is what I learned:

Asia is complex. The impact investing ecosystem is still at its early stage. The government is allocating capital through green bonds or lending mechanisms, but there are only a handful of investors or family offices devoted to the field. Korea has an advantage of its thriving entrepreneurial ecosystem and growing corporate and government initiatives, but from what I learned, Hong Kong and Singapore may need more pioneers to build upon the existing ecosystem and contribute to a cultural shift.

I thought I could be helpful with my experiences in the U.S., but I ultimately felt like taking language from the States perhaps is not the most effective, as they reflect a more Western mainstream attitudinal approach. Network or platform based country-specific initiatives were more effective in attracting private investors, banks, and policymakers for long-term sectoral engagement.

With the protest happening, I kept thinking these populist trends in ethnic, political, or religious divides draw parallel to other countries and trickle down to the Southeast Asian market. Impact investing began after the financial crises that it did not ride with the plunge. Institutionalizing impact investing across asset classes also translate to asset diversification effectively hedging geopolitical and environmental risk for long-term value creation. I’m so grateful for the insight and advice and for new friends who fiercely pioneered through the Asian market.

Translating Risk for Social Impact

“Successful private equity needs macro-economic and micro-economic factors. These include political stability, sophisticated capital markets, corporate governance, strong entrepreneurial structure, and proper benchmarking. Other factors include fragmented markets, low competition, and comparability of funds.”

— Markus Ableitinger, Director of Capital Dynamics

(Originally written: 10.12.2018)

Businesses did not begin to champion social impact or corporate social responsibility until they were truly faced with understanding counter risk to global operations – the effects of environmental, social, and governance in networked operations and stakeholder management. They saw that portfolios with “impact” or ESG indicators have outperformed those during the 2008 downturn, and found impact investing as a method to mitigate short-term risk for long-term value creation. Essentially then, risk tolerance becomes to what extent do we want our dollars to be philanthropic and the type of risk to a portfolio, climate, technology, etc., are equivalent to the opportunity of innovation in the portfolio companies.

However, there is substantial lack of language of risk mitigation in impact investments or studies of political determinants of venture capital investments. Yet, VCs include political stability among the important determinants of receiving VC funding.

The supply of VC comes from the share of risk capital provided by private investors. Along this line, the macro factors are mainly general economy, technological opportunities, entrepreneurial environment, and political risk.

Markus Ableitinger, Director of Capital Dynamics says, “successful private equity needs macro-economic and micro-economic factors. These include political stability, sophisticated capital markets, corporate governance, strong entrepreneurial structure, and proper benchmarking. Other factors include fragmented markets, low competition, and comparability of funds.”

Moreover, venture capitalists and investors are growing in Singapore taking advantage of the country’s political stability, highly educated workforce and strategic location. Despite the fact that micro, macro and even legal determinants of VC financing have more or less been analyzed; changes in political stability of countries have received little attention.

VC investment intensity is the total value of stocks traded, the significance of IPO in a fixed effects model, GDP growth (GDP) as well as inflation, labor market rigidities, and some of the political risk variables – investment profile, socioeconomic conditions, corruption and other determinants.

Given the increasing frequency and intensity of political/economic crises, a more systematic method of measuring political risk and evaluating its impact on market prices is required for emerging markets. Businesses can successfully mitigate and manage macro-political risk in emerging markets with targeted preventive investments into portfolio companies.

For instance, with Khashoggi, the United States is about to sanction specific entities and France and others could also back sanctions, which would affect countries with commercial deals with Saudi Arabia and have a certain number of days to wind down the activities depending on the products being sanctioned – that would translate into – from relying exclusively on export products to opening up domestic companies and technologies less variable to political activities.

For VCs, where we’re concerned with risk in maintaining profits, sustaining economic growth and protecting investments from market fluctuations, we have to manage threats in regulatory relationships, overall legal environment, and geopolitics critical to smooth operations.

Today’s environment requires innovation by companies by both sensing and understanding these risks and in adapting risk management to include networked-based models of information sharing. Each area of risk management is becoming a strategic value for an enterprise, and must be mainstreamed into the entire organization’s value proposition – beyond philanthropy and the CSR paradigm.When portfolio companies are scanned for threat and vulnerability for types of risk, we’re also able to measurably predict the role of companies with business processes that can conduct mitigation potentially as a supply chain partner. We can effectively then incentivize companies for mergers and acquisition, monitor its capacity for IPOs, and others – by geopolitical prediction.