ADB Ventures seeks to launch $100m debt fund by next year

ADB Ventures, the venture investing arm of the Asian Development Bank (ADB), plans to deploy half of its first $60 million fund over the next three years.

Closed in September last year, exceeding the initial target of $50 million, the firm invests in Asian startups requiring pre-Series A to Series A capital in the range of $500,000-4 million.

“We have commitments mainly from the Government of Finland, the Nordic Development Fund, the Government of the Republic of Korea and the Korea Venture Investment Corporation. We also have investment from the Clean Technology Fund,” Dominic Mellor, ADB’s principal investment specialist who set up and co-manages the bank’s VC unit, told DealStreetAsia.

ADB Ventures is set to announce its first set of investments from the fund on March 17.

Meanwhile, ADB Ventures is also planning a second vehicle with a corpus of $100 million to provide debt funding of up to $8 million to technology companies requiring Series B capital.

As companies commercialise their products, “they have to scale across a bigger region and it can be very capital intensive,” said Mellor.

“There’s very little debt funding available. We are designing an ADB Ventures debt fund, which we target to be operational next year.”

Edited excerpts from an interview with Mellor:

Could you talk about the investors who have committed capital to your first fund? By when do you expect the fund to be fully deployed?

We have commitments mainly from Europe and Korea including the Government of Finland, the Nordic Development Fund, the Government of the Republic of Korea and the Korea Venture Investment Corporation. We also have investment from the Clean Technology Fund.

We were targeting $50 million for the fund but we exceeded by $10 million to finally raise $60 million. We target to deploy half of the first fund within the next three years. The remaining half is earmarked for follow-on investments for which we are looking at dispersing over the period of 2024 to 2033.

Which is your average investment size?

We currently invest in two ways. We make equity investments ranging from $1-2 million on average. But we can invest as low as $500,000 and up to $4 million. Typically, we would make these investments in the pre-Series A to Series A-stages. We also have our ADB Ventures Seed Programme, which allows us to provide funding up to $200,000 in exchange for the option to invest in a company’s future equity round.

What are the challenges for businesses in the sectors that ADB Ventures focuses on?

The majority of existing VC funding into emerging Asia is highly concentrated in later-stage deals, in certain sectors like e-commerce, gaming and some fintech verticals. It is also highly concentrated in larger and more developed markets such as the People’s Republic of China and Singapore. But, the flow of investment into sectors like agriculture and cleantech is relatively low. For example, during the 2016-2019 period, only 2% of the total VC deals went to cleantech, and only 1% to agritech. These sectors are very important for the attainment of SDGs [Sustainable Development Goals]. That’s why ADB wants to catalyse more investment into them.

There are three main obstacles that entrepreneurs face in these sectors. One, when a company has developed a prototype, it’s not very easy for them to expand into new markets. South and Southeast Asia have a lot of small markets, so they have to keep adapting the products for each market.

Two, when they’ve successfully adapt to a new market and start to commercialise, the challenge in some of the sectors like agriculture and cleantech is that businesses may also have hardware attached to their solutions. Most VC investments are pure software plays because they can generate returns quicker. So, the sectors ADB Ventures is looking at need more patient capital. There’s potential for exits but also a bit more uncertainty on exactly when.

Three, assuming they are successful in commercialising their products, they have to scale across a bigger region and it can be very capital intensive. In this region, beyond equity, the availability of debt for venture-stage companies is fairly limited.

So, how is ADB Ventures addressing these challenges?

For ADB Ventures, we are trying to be strategic in addressing these three obstacles. Our equity fund is to address the commercialisation, the pre-Series A to Series A stage where these companies need patient capital, and we co-invest with other early-stage investors including VCs. Our ADB Ventures Seed Programme provides funding of up to $200,000 to the companies that are too risky for us to invest directly from the equity fund. So, we provide that money to help them to validate their solutions in a market, and get the option to make a future equity investment in the company from the equity fund. That’s one way we generate a pipeline and de-risk the company. We’ve already done nine of these seeds [seed deals]. The third gap is when businesses scale, there’s very little debt funding available. We are designing an ADB Ventures debt fund, which we target to be operational next year. The debt fund can support companies when they get to the Series B stage and in need of capital to grow.

What’s your take on impact investing in Asia? Do you think investors in Southeast Asia and other emerging markets of Asia are lagging in terms of adopting the ESG theme?

Actually, the trend in the Asia Pacific region is towards more and more ESG investing. The asset class is actually growing quite fast, but of course, from a fairly low base. As a percentage of total asset management, it is very small, at a single digit. But in terms of absolute growth, it has been growing very fast. More and more corporates and institutional investors are also mobilising funding to invest in early-stage companies. And many of these corporates and institutional funders, including corporate VCs, pay more attention to ESG. Also, in some of the jurisdictions, the governments are actively encouraging more types of green investing, particularly in Singapore and the People’s Republic of China. Both the increasing pool of institutional investment funds and regulatory push are going in the right direction. But it will take time to catch up with the levels we see in North America and Europe.

What has been your experience in terms of balancing the impact investment and financial returns goals?

They are strongly associated. Because if we want to generate a huge impact, the company we invest in has to grow rapidly and be very successful. There may be differences in how fast the company can grow, which affects the returns. For us, on the commercial side, we understand the need for rigorous due diligence (DD) process, and the bottom line is clear around how much profit you can make. On the impact side, it can quite vary, depending on who you speak to about what does it mean to generate impact. The lesson we learned is that impact cannot be an afterthought, it needs to be fully integrated into the investment process. As typical funds have commercial DD, we also have impact DD at every stage in the investment process. By understanding what the assumptions are and what the risk could be, we have a better sense of how fast a company has to grow to generate the impact.

How about the pipeline and also the addressable market in your target sectors?

Cleantech can cover many different types of solutions such as energy efficiency, circular economy and access to energy for remote communities. The addressable market for it is huge, considering the intensive demand for energy and the rapid growth of the population. Potential commercial returns can be very attractive in this sector.

If you look at agriculture in APAC, we need to increase food production by up to 77% to feed the population by 2050, but currently, there is still a lot of inefficiency in the food value chain from farms to restaurants. We’re seeing a trend towards more and more investments in agri-tech solutions to solve these problems, from traceability to alternative proteins, and more smart farming technologies. The demand and the market are only going to get bigger as this pain point grows in the region.

For healthcare, with the current pandemic, a lot of telemedicine models are gaining traction. On the financial technology side, there was a lot of inertia on digitisation of the SME sector. But with COVID-19, it has really accelerated now. Digitising them also allows for a lot more potential in terms of linking to credit scoring and access to financial services. That is also a huge addressable market.

Within Southeast Asia, markets like Singapore, Indonesia and Vietnam are getting a lot of VC investments. Where do other countries stand?

Every market in Southeast Asia has its comparative strengths. For example, the Philippines, population-wise, is the second biggest economy in the region. It’s an English-speaking country and has a lot of talent in programming and coding. Or, Thailand, which is the second biggest economy in Southeast Asia from a GDP perspective, has comparative strengths in certain sectors like medical healthcare and agriculture. Even a smaller market like Cambodia has a very attractive regulatory regime for microfinance. Quite a few fintech companies choose Cambodia as the first market to test their product solutions before they decide to expand to countries like Vietnam.

Corporate governance plays an important part in preventing risks for the companies as well as investors. Following the case of Revolution Precrafted in the Philippines, what do you think is the impact on the general ecosystem? 

The Philippines, before and after this particular case, is still an attractive market for us because of the fundamentals. There are always many cases like these across different countries that highlight the importance of adequate integrity due diligence. For ADB, we have a lot of experience and processes to undertake integrity due diligence of the companies we invest in. We look very carefully at all the shareholders and management to identify potential risks. We see that as an advisory service that we also provide to the startups to protect them as well as help companies to attract future investments.

It’s very normal that early-stage companies have to gradually build up the system and their capacity. We can help them identify, for example, some risks in their governance or board structure, and require them to make some progress in these areas.

How will the political situation in Myanmar impact your investment mandate for the frontier market?

ADB has been a trusted and committed partner with Myanmar as it sought to reengage with the international community. Together, we have made real progress towards sustainable, inclusive, and resilient growth over the last eight years. ADB remains fully committed to these objectives and to supporting Myanmar’s social and economic development. ADB is concerned about the current situation in Myanmar, which could constitute a serious setback to the country’s transition and development prospects.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.