Aavishkaar Capital, one of India’s largest impact investors, is raising a $150-million vehicle targeting investments in Indonesia, Vietnam, Bangladesh and other emerging markets in Southeast Asia.
The vehicle will be Aavishkaar’s seventh and largest fund with a target to close next year, a top executive told DealStreetAsia in an exclusive interaction.
The firm is not new to this region having managed a $48 million frontier markets fund (Aavishkaar Frontier Fund) deploying capital in markets such as Indonesia, Bangladesh and Sri Lanka. Aavishkaar manages six funds in total, overseeing $450 million worth of assets under management (AUM) across the Indian sub-continent and Indonesia. It also boasts a track record of more than 67 investments with 36 full and partial exits in all.
“Our investment thesis would be similar. We will look to invest in impact businesses that engage with low-income communities, with an additional focus on sectors of agriculture, livelihoods and financial services,” said Aavishkaar Capital senior investment manager Adi Sudewa.
The firm is also looking at cutting bigger cheques ranging from $5-10 million for the new fund, indicating that it is seeking slightly more mature opportunities in the market. It used to invest around $1-5 million in its portfolio companies.
Aavishkaar has made a number of sizeable bets across its nine investments in the region. These include Indonesian furniture retailer Fabelio’s $6.5-million Series B round in 2018, and Sri Lankan B2B e-commerce firm Sindabad’s $4.15-million round in May last year.
Impact investing trends
The COVID-19 pandemic is likely to influence the direction and nature of impact investing, according to Aavishkaar. It expects sectors that are essential to human lives to rebound during this period and will be adjusting its strategy for this sector as well.
It also forecasts the global economic slump to have a neutral to a positive impact on most social sectors such as food, agriculture, healthcare, sanitation and education. These are all areas where activities continue regardless of an economic downturn.
Most of Aavishkaar’s limited partners (LPs) are development finance institutions (DFIs) from Europe as well as India. They also have a US pension fund, philanthropic foundations, and high financial net worth individuals or family offices as LPs.
With regard to fundraising, Sudewa acknowledged that it is generally a challenge to get LPs to understand the different capabilities and track records that impact fund managers bring to the table. A lot of this has to do with the ambiguity of measuring the true impact of impact funds.
“There is a continuum of impact investing approaches, and currently there’s not much clarity beyond a simple categorization of impact versus non-impact funds,” said Sudewa.
“Whether LPs want to invest in funds that invest only in mature business models and markets, or enable a larger impact by putting money in GPs with track records investing in early-stage companies, evolving business models, in the geographies where the low-income communities reside – still remains unclear,” he added.
There is also the challenge of “mission drift” where portfolio companies begin to steer away from the original mission it was founded upon, especially after they’ve found themselves an exit.
“We need to collate best practices on how our investee companies can engage the suppliers/customers better and how to make the impact embedded in the DNA of the companies. That way if we exit the companies, the new investors or shareholders do not change the impact mission of the companies. The industry is very early in this regard,” explained Sudewa.
Aavishkaar isn’t the only impact investor seeking investments in the region.
Sudewa noted an influx of mainstream private equity (PE) players like TPG and Bain Capital entering the space, both of which contributed to diverse approaches to impact investing. US-based venture capital firm Patamar Capital is also understood to have closed a $200-million fund targeting impact investments in South and Southeast Asia.
But there is still plenty of room to grow in the wider impact investment arena.
According to research by the International Finance Corporation (IFC), impact investing is still relatively small with market size of up to $2.1 trillion, meeting only 10 per cent of current demand. The report however noted that the global recession caused by the COVID-19 pandemic has not slowed investor interest, and continues to attract investors into this space.