The Landscape for Impact Investing in Southeast Asia, GIIN and Intellecap Report

Recommendations

A growing number of impact investors is searching for investment opportunities in South East Asia. To access this new source of funding, companies are recommended to:

• Explore new business approaches and models that generate positive and scalable social and environmental impact. Social entrepreneurship has surged in the region, while inclusive business has been adopted as an MSME development strategy by ASEAN. These provide opportunities for incremental or new business development that can attract funding from impact investors.
• Work towards greater financial sustainability. Although enterprise grants are becoming readily available for the different stages of business development, investors give premium to an enterprise’s long-term financial viability and sustainability. Demonstrated financial sustainability increases an enterprise’s ability to unlock next stage funding.
• Leverage changing trends in development aid. Grant flows across the region are evolving with increasing socioeconomic development. Local enterprises and for-profit organizations should also look key development trends and impact areas in their respective countries, as identified by government, and local and international development agencies. Also explore development aid as potential sources of complementary investment.

Investors are being challenged to design accessible financing schemes for small enterprises and excluded enterprises (e.g., large number of rural, informal enterprises and MSMEs); increasingly tap into philanthropic capital either directly for impact investing or by designing hybrid capital models; diversify investments by identifying new impact sectors based on country-specific trends and challenges; increase local context understanding among fund managers for more effective capital deployment; and increase transparency on investment performance within the investment community for better peer learning and practice.

Existing government support programs for impact-generating business (i.e., CSR, social enterprises, inclusive businesses) should connect these enterprises to impact investors to add to their investment pipeline. Enterprises and investors will also greatly benefit from policies that make “ease of doing business” happen both at the local and regional level. Intermediaries that can connect philanthropic stakeholders with impact investors are needed to accelerate impact investing by (1) providing support to help philanthropic actors to transition to impact investing, and (2) design hybrid investment instruments.

Investors around the world are stepping up financing towards impact to help build more open, inclusive, resilient marketplaces for different types of enterprises. Impact investing is a financing model being adopted by a growing number of public and private investors, which supports companies and enterprises that engage in social problem-solving through business, and in the process, ensure wider business environment sustainability—people, planet, and profit.

Southeast Asia is a becoming a global economic powerhouse, producing an estimated combined GDP worth USD 7.6 trillion (growing at around 5% per year), and generating new industries and enterprises—i.e., e-commerce, microfinance, hospitality, and agroprocessing—spurred by increasing government support for private sector growth, ASEAN’s drive towards regional and global economic integration, a young population, and a rising consumer base. This report by the Global Impact Investing Network and Intellecap looks into the impact investing ecosystem in Southeast Asia, and the experience of two types of investors present in the region: private impact investors (PIIs) such as fund managers, philanthropists, foundations, commercial banks, and pension funds; and government-supported development finance institutions (DFIs) such as the World Bank’s IFC, and the Asian Development Bank (ADB). The report includes a list of active PIIs and DFIs in the region.

The report finds a growing number of impact investors in Southeast Asia, with DFIs providing bulk of the investments. DFIs typically fund large-ticket projects and growth-stage to mature enterprises seeking additional financing for business development or scale up. From 2007-2017, DFIs have deployed around USD 11.3 billion (with IFC being the largest DFI investor) in impact capital, covering 90% of all impact capital invested in the region. Indonesia, the Philippines, and Thailand have been large markets for DFIs; Myanmar and Cambodia are increasingly getting more investment since 2013. PIIs, on the other hand, provide early-stage capital to startups, social enterprises, and SMEs. DFIs also invest in PIIs—typically impact fund managers—to support smaller enterprises. Between 2007-2017, PIIs have deployed impact capital investments of about USD 904 million, with Cambodia, specifically its microfinance sector, attracting a sizable chunk (45%) of all PII investments. High PII activity was also observed in Indonesia, the Philippines, and Vietnam.

Based on the more than 500 deals surveyed, DFIs and PIIs primarily channeled impact investments to three sectors: financial services (particularly microfinance), energy, and manufacturing. Emerging sectors of interest are agriculture, ICT, education, and healthcare. A handful of PIIs have made gender lens investments (“investments into companies, organizations, and funds with the explicit intent to address gender issues or promote gender equity”) to microfinance institutions in Indonesia, the Philippines, and Vietnam. This is notable because other investors consider gender impact only after investment, rather than using gender impact to inform investment decisions.

Southeast Asia offers a promising space for impact investing, However, the ecosystem for impact investing in the region remains largely fragmented. This is due to varying business ecosystems, levels of economic development, and sociopolitical climate across countries. The private sector still has limited knowledge about impact investors. It was also highlighted that much of the impact capital comes from foreign investors operating outside of the region. The report notes that while Indonesia, the Philippines, and Vietnam already have mature impact investing ecosystems, the rest of the region has yet to catch up. Local actors other than impact investors—enterprises and support intermediaries like incubators, accelerators, business advisors, local investors—should step up to help more enterprises become impact investment-ready.