The Impact Investment Market in South and Southeast Asia (Market Snapshot – Impact Investment Funds)
A spectrum of models and opportunities
There is a spectrum of opportunities for investors in the impact fund market in South and Southeast Asia with varying levels of risk, potential for financial return and potential for impact. The segmentation of impact funds provided in this market snapshot seeks to provide prospective investors with an overview to identify the category of funds that align with their unique goals and objectives:
- Impact investing funds in South and Southeast Asia encompass a range of models which can broadly be divided into four categories based on: the stage of SME they invest in, whether they pursue an implicit or explicit impact thesis and whether they target risk-adjusted market rate or concessionary financial returns. Although all categories are, by definition, “impact investors,” their respective investments have different risk-return profiles with respect to financial returns and social impact objectives.
- The impact investment market in South and Southeast Asia is nascent and fragmented. Few global funds are active in the region and those that are tend to invest only a very small portion of their portfolios in the region. Smaller regional funds are struggling to both make early stage investments and help build investable SMEs through supporting incubation activities.
- Funds based in the region tend to invest in early stage SMEs. By creating a pipeline of
investable companies for the larger funds, these regional funds play an important role in
building the impact investment market. They also invest in the most pioneering and unproven innovations, and are primarily focused on businesses that target the BoP or have an environmental impact.
- Raising capital is increasingly more difficult for smaller, regional and national level-funds
targeting earlier stage SMEs and unproven sectors. Fund managers interviewed echoed the desire for investors that were willing to take a higher risk to support the nascent impact investment sector in the region, targeting early stage SMEs and innovation at both the fund and investee company level.
- From a financial perspective, the risk of investing in early stage SMEs and unproven business models is not acceptable for most investors. Funds focused on this stage have engaged donor agencies, governments, and private philanthropists who are willing to accept higher levels of risk in return for the potentially higher levels of impact. In a Blended Finance model, these investors seek to leverage traditional investor capital focused on risk adjusted financial returns by taking on a larger portion of the financial risk. Based on interviews with fund managers, there is more appetite for Blended Finance, both at the fund level and on a direct deals basis.