SE Asian PE-VCs warm up to net zero emission goals with more green funds

Photo by Guillaume de Germain on Unsplash.

Among investors in Southeast Asia, an interest in climate change was, until recently, rare — mostly the preserve of international development institutions such as the Asian Development Bank (ADB).

Now, a lot more private funds have risen to the occasion, given the urgency of the climate crisis and the realisation that green funds, too, can generate alpha.

Two Southeast Asian investment firms – private equity firm Tembusu Partners and venture capital firm Wavemaker Partners – announced new funds on Thursday to tackle climate change.

Tembusu has launched the Sustainable Future Fund in collaboration with media and business intelligence company Eco-Business. The fund, which is targeting to raise $100 million, will pursue growth-stage opportunities focused on addressing the climate crisis and other sustainable development challenges.

Early-stage investor Wavemaker launched a new climate tech venture builder with a target corpus of $25 million. The firm says it has identified high-growth and scalable opportunities in climate change with a total potential market worth $2 trillion in Southeast Asia alone.

Earlier this month, Baring Private Equity Asia announced a $3.2 billion sustainability-linked loan programme to focus on climate change, besides gender diversity.

In May, Swiss infrastructure fund manager SUSI Partners held an $81 million first close for its Asia Energy Transition Fund, which will focus on Southeast Asia. Wymen Chan, managing director of the firm’s Asia investment team, told DealStreetAsia that a final close is planned for 2022, but an intermediate close is expected by the end of this year.

“Sustainability should be present by default in any investment strategy so that we can get to net-zero by 2050,” said Chan.

Another “green” fund investor with eyes on Southeast Asia is the Australian VC Investible which has a A$100 million ($74 million) Climate Tech Fund. Tom Kline, head of climate tech at Investible, said the firm has approved two further investments in SE Asia.

Meanwhile, Singapore-based Clime Capital is raising a $50 million vehicle — the Southeast Asia Clean Energy Facility (SEACEF).

These new green funds join a long list of sustainability-related commitments this year, including the ADB’s $100 million climate financing to member developing countries until 2030.

The ADB has also partnered with HSBC, Temasek, and Clifford Capital Holdings to set up a debt financing platform to boost commercial development of sustainable infrastructure projects in Asia, with an initial focus on Southeast Asia. The initiative will see HSBC and Temasek act as equity partners in the platform.

Other programmes include investment bank UOB’s U-Energy, an integrated financing platform for energy efficiency projects in Singapore, Malaysia, Thailand, and Indonesia.

Sustainability-focused funds in Southeast Asia

Expand Table

Fund/ProgrammeManagerSize/TargetYear
Sustainability-linked facilityBaring PE Asia$3.2B2021
Southeast Asia Clean Energy FacilityClime Capital$50M2021
Asia Energy Transition FundSUSI Partners$250M2021
Climate Tech FundInvestible$74M2021
Wavemaker ImpactWavemaker Partners$25M2021
Sustainable Future FundTembusu Partners$100M2021
8F Aquaculture Fund I 8F Asset Management$358M2020
Petronas VenturesPetronas$350M2019
Makara Capital Innovation Fund Makara Capital$700M2018
Capsquare Asia Partners Fund II Capsquare Asia Partners$150M2017

Source: Southeast Asia’s Green Economy: Opportunities on the Road to Net Zero – Bain, Microsoft & Temasek; and DealStreetAsia

There must be a focus on climate action, “or it will be too late… to meet net-zero goals by 2050,” Chan, of SUSI Partners, added.

Value in niche sectors, early-stage investments

Around $1.9 billion was invested into sustainability projects that aid in achieving net-zero emissions — energy solutions, waste and water management, sustainable materials etc. by PE and VC firms in 2020, according to the ‘Southeast Asia’s Green Economy: Opportunities on the Road to Net Zero’ report by Bain, Microsoft, and Temasek released in September. That represents a sharp growth from $300 million in 2019.

Sustainability-linked investments also accounted for 19% of the total PE-VC deployment in the region last year, compared with 5% in 2016.

Moreover, among green funds, there was only one fundraiser each year during 2017-20, the report notes. There are a lot many of them, now.

Around 72% of the PE-VC capital into sustainable investments in Southeast Asia have gone into energy solutions — low-carbon, energy efficiency, and grid solutions — followed by waste and water management, and sustainable materials, according to the Bain, Microsoft, and Temasek report.

Other nascent but promising sub-sectors include sustainable food systems, and the conservation and restoration of nature.

“Notwithstanding COVID-19 issues, Southeast Asia presents opportunities for disciplined, local private equity managers in specific sectors,” said Janette Aguto Hall, director of investment funds and special initiatives at ADB’s private sector operations department.

There’s also a great opportunity to participate in early-stage green investing, opined Clime Capital’s senior executives. “The traditional way of investing is being outpaced by more entrepreneurial, early-stage investors that can take more risk,” said Mason Wallick, managing director at Clime Capital and an investment committee member at the firm’s SEACEF fund.

Given the infancy of environmental and social investing in Southeast Asia, there are very few investible projects for large utility funds, added Clime Capital’s director Joshua Kramer. “What we do is try to fix that problem by providing early-stage capital… bridging the gap until infrastructure funds are able to take on projects. There needs to be a lot of other SEACEF for this region,” he said.

While early-stage is the riskiest, Wallick asserted that these are “reasonable risks” given that in a few years’ time, Clime Capital’s fund will create deep values.

Investing early is also a way to yield more opportunities for pre-IPO exits, and earlier options for liquidity, according to Kline of Investible. “There’s a need for investors to back climate tech companies early on in their journey so that more founders can reach those later stages of growth and deliver climate solutions at scale,” he said.

On the tech front, Investible points to a once-in-a-generation opportunity for technology investors to address climate issues.

Kline revealed that Investible’s Climate Tech Fund has seen more than 200 investment opportunities that fit within its mandate in just the last three months, spanning from waste and reuse opportunities to food and agri-tech companies.

Returns uncompromised

Given the immense opportunities in the region, the misconceptions regarding poor returns on green investments have changed.

“There are multiple revenue sources that meet the requirements of a decent return,” said Wallick.

The opportunity for impact investors today is much bigger than what managers can invest in, according to Tan Shao Ming, managing director at ABC World Asia. It is “large enough for all of us to be investing in, to make healthy returns financially,” he said at the Asia PE-VC Summit organised by DealStreetAsia last month.

Between 2015 and 2020, the median gross IRR for buyout deals stood at 24% for sustainability investments and 21% for other private market investments, according to the Bain, Microsoft and Temasek report quoted earlier. In the upper quartile, the IRR was 47% for sustainability investments and 42% for private market investments, respectively.

“There is a growing body of evidence that investing according to ESG principles is a fundamentally good strategy in the long term. High corporate standards for ESG issues generally indicate that the companies are responsibly-managed; these companies tend to outperform the market,” noted ADB’s Hall.

SUSI Partners’s Chan said he had seen value come to zero in projects that were not ESG compliant. “When we exit, we want the portfolio to become a development pipeline of credible, high-quality assets. The future growth of the platform is expected to give us a premium,” he said.

Andy Ho, the chief investment officer at VinaCapital, has similar principles. He summed up his firm’s ESG strategy at an investor conference on Oct 26: “In every private investment, we bring in an international firm called ERM to do due diligence on the business. Our shareholder agreement allows us to put in penalties in case they [investees] are unable to live up to their commitment in terms of ESG improvements.” 

Risks and challenges

Yet, the high returns come with higher risks, especially in Southeast Asia where each market is unique, and goes in and out of cycles. In order to weather those cycles, experts have opined that successful investors in the field need to have a presence on the ground.

“It’s critical to have local teams on the ground who are familiar with local laws, business practices, and regulatory frameworks. It’s also always important in emerging markets to have balanced risk management frameworks established to manage some of the unexpected risks that may occur in implementing projects,” said Hall.

The renewed investor interest notwithstanding, there existed a $102 billion annual financing gap in eight of the 11 Southeast Asian countries between 2016 to 2020, according to ADB. And COVID-19 may have worsened this.

Traditional investors must build a portfolio that has a significant amount of investment-grade exposure — in Japan, South Korea, or Australia — that means there is limited capital available to “some of the more interesting countries,” said Wallick.

“This region has generally been overlooked by private capital. The number one reason is that it’s fragmented. If we can create a platform that’s cross-border, that will be very attractive to an institutional investor,” SUSI Partners had told DealStreetAsia in an earlier interaction.

Nevertheless, the need for sustainable investing cannot be overstated. “Science tells us that this is the last decade we have to take action without irreversible climate changes, and technology is the key to unlock climate solutions at speed and at scale,” said Kline.

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.