Sustainability is becoming an integral part of due diligence in venture capital, and Vulpes Investment Management is taking a hard look at its portfolio and investment processes, said Stephen Diggle, founder of the family office-backed firm.
“There may be changes in the portfolio,” Diggle said in an interview with DealStreetAsia. “And there may be a change in emphasis.”
The firm is now in the process of raising its third VC fund, and is expected to make the first investment from the fund this month.
To ensure that its investments adhere to sustainability principles, Vulpes has recently appointed Sadiq Currimbhoy to the firm in a newly-created role of Head of Sustainability.
Currimbhoy, who was formerly Head of Sustainability at Maybank Kim Eng Securities in Singapore, is undertaking an audit assessment of Vulpes’s existing investments.
Diggle believes there is “enormous scope” in Asia to invest sustainably for the long term, and that family offices and family-run businesses have an advantage in their ability to invest in sustainability and for the long term.
In Asia, in particular, there is a significant opportunity to improve the ‘G’ in ESG, or governance.
“Governance issues continue to be the single biggest destroyer of wealth and the biggest problem in the region,” Diggle said. “If governance got better, everyone would be better off; return on equity and capital would be higher. Growth would be higher. There’s no trade off there.”
Vulpes’s VC portfolio has focused on digital businesses. It was an early investor in proptech company PropertyGuru, and retail tech unicorn Trax, and has since partially exited both investments. Other companies in its portfolio include restaurant reservation platform Chope, Australian telemedicine startup Rosemary, and enterprise services platform Qwikwire.
Last June, Vulpes launched a Special Opportunities Fund targeting companies affected by the COVID-19 crisis. There have been 21 investments made from the fund, including in New Zealand-based investment platform Sharesies, and Vietnamese delivery platform Loship.
Separately, Vulpes has a fund management partnership with US-based Patamar Capital.
Edited excerpts of the interview:-
What do you make of the sustainability investment landscape in Asia?
The focus [on sustainability] is definitely less pronounced in Asia, than in Europe and certain parts of the US. I think that’s an opportunity – it inevitably will get greater here.
Asia has been focused on growth. We have gone through the most extraordinary transformation: a billion people have been lifted out of poverty. But inevitably, while that’s going on, people are focused on the accumulation of wealth because they’re escaping poverty. It’s perfectly legitimate to have a lower focus on these issues, when you’re facing the biggest issue of all, which is poverty. [But] the costs of accelerating this growth are now very clear.
We are currently going through what will undoubtedly be the largest exchange of wealth in Asian history, and it’s significantly from first generation to second generation. There’s no doubt the second generation inheritors are much more focused on these issues, partly because of their generation, and partly because they have a different way of looking at the world to their parents. So although I think Asia is not as focused on these issues, yet, it’s only a matter of time. But that time is going really quickly. We might as well be early, rather than late.
What capitalism needs to do is to balance growth against other externalities – environmental and social impact. And those things are clearly much more in discussion now. What sustainability is trying to focus people’s [attention] on is, if growth is going to be sustainable, it needs to be measured against a broader range of things rather than just GDP, or profit in the short term.
What do you make of suggestions that sustainability issues are best left to bigger funds with more resources?
I think that’s dangerously wrong for a couple of reasons, the major one being that unless you focus on these issues, the chances that the businesses you invest in or indeed your own business, can have catastrophic failure. And there are numerous examples.
I don’t think sustainability is a luxury. It’s a necessity, and the chances that something will happen which will massively affect your business are just going up.
The other thing is that you can’t be reactive, you have to be proactive. Very often, the damage has been done and you will not be able to get out of it. That’s especially true for families and family businesses. If you’re an institutional investor, with a full portfolio, you might be able to [divest risky holdings]. If it’s your family business, and has been for a century, you can’t make that decision.
What and where are the opportunities for sustainability investing in Southeast Asia, particularly given many businesses are family-controlled? Is there a particular business that is ripe for this?
It’s a huge one, for two reasons. One is we are behind. But I think that the capacity for family-controlled businesses to change is actually much greater than big organisations.
When you look at big corporations these days, leadership changes pretty quickly – the average CEO is only at the top of the company for five or six years. In many countries they’re on an election cycle – they’re always looking at the next election. So the ability to plan for the long term doesn’t really exist.
Changing big organisations is really difficult. But if they’re family-led, the number of people who need to be persuaded to make a change is relatively small. And a properly-run family business is actually already thinking of it, and thinking of the next generation. It should be an incredible fertile ground, and we could see a lot of changes very quickly,
In Asia, the easiest thing to improve is the ‘G’ [governance]. Governance issues continue to be the single biggest destroyer of wealth and the biggest problem in the region. Corruption remains a massive impediment to the development of businesses.
If governance got better, everyone would be better off; return on equity and capital would be higher. Growth would be higher. There’s no trade off there.
You will not survive long term, if all you do is focus on getting through tomorrow. So focusing on the next quarter, or the next earnings cycle – that is not how you build resilient, successful businesses.
I see the scope in this part of the world as being enormous. We are seeing, you know, a new generation of businesses and business people in this part of the world, which is incredibly exciting.
What does it mean for Vulpes to have a Head of Sustainability?
We will do a thorough audit on everything that we’re currently involved in. There may be changes in the portfolio. And certainly for the businesses we already control, we may change our practices; we’re open to being better. And there may be a change of emphasis.
The other thing is it means that the sustainability part of the exercise will become more important in everything we do. There will be an increasing emphasis on both investing in businesses and business practices that [are] more sustainable, and conversely, not investing in and getting out of businesses where the sustainability metric is not met.
[In terms of metrics] A lot of the conclusions have come down to simplistic thinking: Coal, bad; wind power, good; meat, bad; plant, good.
We need to be much more practical and nuanced and pragmatic. It’s quite possible [for example] that Indonesia does need coal-fired energy, because a lot of people in Indonesia don’t have access to power. And the country is not going to get to where it needs to be, where it wants to be, on solar and wind tomorrow.
We understand that Asia’s principal objective is going to be the creation of wealth. We’re not going to end up with a scoring system, which gives Company X five, and Company Z a seven and therefore, sell X and buy Z.