Singapore-based ABC World Asia, the impact investment fund, says there is more room for growth in the pure-play impact investing space.
“We believe there is a big enough pool for us to generate returns that are benchmarked against conventional private equity and VC funds,” ABC World Asia managing director Shao Ming Tan told DealStreetAsia in an exclusive interview.
Backed by Temasek Trust, Temasek Holdings, Pavilion Capital, Mapletree, Seatown Holdings, and Sembcorp Industries, ABC World closed its first fund in January 2020 raising S$405 million ($303 million). The impact investor has deployed S$98 million so far in five portfolio companies across Singapore, Vietnam, India, China, and Australia.
The latest investment by ABC World was its participation in the $24 million Series B round of Vietnam’s Kim Dental, a dental care platform, in February. The company came under ABC World’s radar because of the under-penetration of dental care in Vietnam — there are only 0.4 dentists for every 10,000 people in the country. In comparison, Singapore has about four dentists per 10,000 population, according to WHO data as cited by Tan.
ABC World’s other investments include the Singapore solar energy company Sunseap, the China-based microfinance company CD Finance, Australian plant-based meat V2 Food, and Indian agritech company Cropin. At around S$33 million, Sunseap is its biggest investment so far.
In 2020, there were around 200 deals reviewed by ABC World. Most of them fell through for various reasons — unreasonable valuations, or many were too early-stage opportunities, said Tan. “We generally position ourselves as a growth-stage investor… we are unlikely to be very early in the whole VC cycle.”
ABC World has not fixed a timeline to fully deploy its first fund, but Tan said investment size may start at S$10 million ($7.49 million) and pre-profitable companies are also within ABC World’s investment radar. The firm will also continue to seek opportunities across key geographies primarily in South Asia, Southeast Asia, and China.
Investment sectors include five themes — financial and digital inclusion, better health and education, climate and water solutions, sustainable food and agriculture, and smart and liveable cities.
Below is the edited excerpt of the interview with Tan:
What sort of metrics do you use when you look at potential targets?
We are a pure-play impact investing PE fund, which means 100% of our investments have to meet both criteria — financial returns and impact. Matrices vary from sector to sector, but we apply a very rigorous and evidence-based approach towards impact evaluation and assessment.
One of the most important elements is intentionality. We look at the intention of the company’s sponsors — the key management and shareholders — because we want to avoid a drift away from the initial impact mission. The second stage is impact assessment, where we evaluate the companies across five dimensions, consistent with the impact management project (IMP). The impact evaluation is something a conventional private equity fund will not have. And then we continue to track these matrices post the investment.
How do you balance impact and returns?
If we look at the opportunities an impact investor has, there’s a smaller investable set compared to the conventional market. At the same time, we believe there is a big enough pool for us to generate returns that are benchmarked against conventional private equity and VC funds. The returns that we are seeking are no different from what they are seeking.
We want to avoid this trade-off by careful evaluation and making sure that the management and sponsors behind the company have an intention to pursue impact; we do not want this trade-off to become a conflict after we invest. That’s a very critical part of our risk management.
Are the impact investment matrices similar to ESG investing?
For ESG [Environmental, Social, and Governance], investing is more geared towards risk mitigation, and avoidance of harm. Impact investing, in ABC World’s context, is to find a solution that can deliver a positive impact, or a positive social or environmental outcome, that is aligned to one of the 17 UN Sustainable Development Goals (SDGs).
How much more proactive do you have to be in looking for impact investment targets, particularly in the face of COVID-19?
In the last year, we evaluated over 200 potential deals and closed five. We believe that there are sufficient opportunities for us, and we see similar trends in our pipeline today, compared with last year. It is well distributed geographically and across the five themes that we are looking to invest in.
COVID has disrupted many business models and has also accelerated certain trends such as the digitalisation of healthcare, education, financial access. And at the same time, it also made people realise that the world is connected, and they are more receptive to addressing global problems like climate change. So I think all these provide additional opportunities, but also competition.
How does ABC World Asia, as an impact investor, differentiate itself from other impact-oriented investors, particularly global funds that are looking at Asia, and development finance institutions (DFIs)?
Everyone has a slightly different strategy. At ABC World, we are growth equity providers, so we only focus on providing the equity piece in minorities. Some of the other investors will be looking to play across other parts of the capital structure, which could be private debt, etc. We are based in Asia, headquartered in Singapore, we understand this region. So, we’re fairly comfortable in terms of the opportunities that we see.
Does being a growth-equity, minority-stake owner give you enough power to drive change and ensure that your impact is delivered?
Even as minority investors, we are not passive. Before we invest, we also set some expectations in terms of the areas that we care about and the areas that we want to continue working with these portfolio companies post-investment. Typically, we will also have some kind of representation on the boards for us to drive changes with the companies.
Would you say that private equity has been slow in taking up impact investment opportunity, particularly in Asia?
I think this space is increasingly attracting interest from unconventional, and even conventional private equity groups. Yes definitely, there will be more interest and more competition going forward. There are different pockets moving at different speeds across different segments. For example in the ESG space, you probably see more action, whereas the impact space is only beginning to take off. It is still a nascent market, and there’s still room for growth.
Why is there increasing activity in the impact investment space?
There’s a need for us to recognise that finance can be a force for good. Rather than focusing on making money, there should be a purpose to finance. There is greater recognition of this today, and that is being reflected in the number of impact funds being set up. Investors are increasingly using ESG as one of the criteria when they make investment decisions.
How would you strategise your exits, what would be an ideal outcome in your case?
Exit pathways are probably not very different from conventional funds… we could seek a listing or a trade sale. But what we hope to do is from the point we invest to the exit, we should have added value to the company, both from a financial angle and also from an impact angle. Such that the company is in a healthy position during exit and is able to attract both conventional financial investors, as well as impact investors. We hope that by generating healthy returns for our investors, we can also convince them that this is another way to deploy your money. Thus, we can channel a greater part of the funds, which is available in conventional financial markets, towards impact investing and towards generating good socially and environmentally.