Asian Private Banker speaks to Bernard Fung (BF), head of wealth planning services, and Joost Bilkes (JB), head of responsible and impact investing for the Asia Pacific at Credit Suisse Private Banking, about the lender’s plans for its US$55 million impact investing fund – a partnership with UOB Venture Management.
APB: How much did Credit Suisse and UOB Venture Management ultimately raise for the impact fund, and what is the fund’s mandate?
JB: The fund achieved a final close of US$55 million in December. Although Credit Suisse has been active in impact investing for 15 years, this is the bank’s first Asia-focused impact solution where we partnered with UOB Venture Management, providing exposure for ultra high net worth clients and external investors to invest in small- and medium-sized enterprises whose businesses address key social challenges. The fund invests in China and selected ASEAN (Association of Southeast Asian Nations) member countries, including Indonesia, Philippines, Thailand, Vietnam, Cambodia, Myanmar and Laos. The target geography reflects the range of attractive investment opportunities in companies with innovative approaches to social challenges encountered by the poor.
APB: Can you give us a breakdown of the fund’s investors?
BF: The fund was showcased to approximately 200 clients. Nearly 80% of commitments came from Asian UHNW clients. Many UHNW clients are entrepreneurs themselves and, as such, are interested in familiar sectors or those related to their businesses, for example, healthcare, renewable energy and agriculture. We also saw interest from millennial clients who have gone to top universities around the world and are cognisant of impact investing as a strategy for achieving social change and poverty reduction. On a related note, we are actively working with INSEAD and the University of St. Gallen to provide guest lectures for MBA students on impact investing.
APB: How is the capital being put to use?
JB: Capital deployment must be prudent yet consistent. The fund is likely to make 10-12 investments, with an average size range of US$2-8 million. As at July 2017, six deals have been approved by the investment committee of the fund, and it is anticipated that two further transactions will be completed by year-end.
The fund mobilises the extensive networks of UOB Venture Management and Credit Suisse. The objective is to build and scale companies which offer sustainable, profitable solutions to social and, in some cases, environmental challenges.
For example, the first deal by the fund was in a nutritional supplement manufacturing company in China which has a profitable business. The company provides supplements to infants in poverty-stricken counties across the country, targeting conditions like child stunting, anaemia and general malnutrition.
Another compelling investment is in a fertiliser company based in one of southern Vietnam’s poorest provinces. The company has developed controlled-release ‘smart’ fertilisers, which reduce greenhouse gas emissions associated with rice cultivation by 80%, while increasing yields by nearly 20%, resulting in higher incomes for poor farmers.
APB: Does the fund prioritise social impact or financial performance?
JB: The fund is seeking to have a profound demonstration effect on investors and asset managers across the region in the following way: investing in companies in which the commercial performance and profitability is predicated on the achievement of social impact, and vice versa. The nutritional supplement company we invested in is a perfect example. The greater the reach of the fund, the greater its impact and therefore the higher the profitability. The investment team believes, as borne out in its transactions, that there need not be any tension between achieving positive social outcomes and generating attractive financial returns.
APB: What is UOB Venture Management’s role in these deals?
JB: We are leveraging UOB Venture Management’s footprint and network in Southeast Asia and China, collaborating on deal sourcing. UOB Venture Management is responsible for all financial and investment-related aspects of the fund. As the impact advisor, Credit Suisse assesses the suitability of investments from a social and poverty-related perspective, and identifies opportunities to add value to transactions as they develop. As such, Credit Suisse participates in the due diligence process and investment development phases of the transaction cycle. Importantly, in the interests of both transparency and publicising the fund’s approach and achievements, we regularly provide opportunities for clients to visit investee companies and engage directly with the entrepreneurs in our portfolio.
APB: Can you explain the metrics you use to assess impact?
JB: We are mindful that companies can be over-burdened by measurement, which has become an industry in itself in the impact investment community. The fund’s results framework has selected key, manageable metrics – for example, employment generation, number of beneficiaries positively affected and so on – to be assessed on a semi-annual basis. This is complemented by a far more in-depth annual development impact report, which provides quantitative and qualitative analysis of the impact of our investments. The first such report is due for publication in November 2017.
With regards to the fund, we want to be fully transparent to our investors. For example, we hold investor meetings to keep them in the loop, and some investors have travelled with us for field visits.
APB: And when do you stop measuring the impact of an investment?
JB: Upon exiting the investment.
APB: Is the dearth of data, and therefore the lack of track records for such investments, an issue with your clients?
JB: In Southeast Asia and China – unlike India, Africa and Latin America – there are few impact funds which focus on expansion capital opportunities in the US$2-10 million space, and which adopt a commercial approach to impact investment. It is not so much the paucity of data that is the problem; rather, the fact that many impact funds raised to date have been small and focus on relatively small transactions in so-called ‘social enterprises’. Not only is the risk profile of such US$0.5-2 million deals far higher – venture capital risk, in essence – but they are far more intensive and have a higher likelihood of failure. The returns are simply not commensurate with the risk. In engaging with clients, it was critical to differentiate our lower-middle-market fund with such opportunities.
APB: What challenges have you faced in the deployment process?
JB: The challenges are akin to those faced by any well-run private equity fund. Identifying entrepreneurs who are aligned, share the values of the fund and seek long-term partnership for value-creation is always difficult. Fortunately, the networks of both UOB Venture Management and Credit Suisse are sufficiently robust and that supports our deal flow.
Another challenge is that communications on the ground can be tough at times in non-English speaking countries.
APB: Have you encountered any regulatory scrutiny when advising on the fund?
JB: Credit Suisse adheres to the very highest standards in compliance with all relevant regulatory bodies in Singapore, and in the countries where the fund invests in.
APB: What is next in the impact investment pipeline for Credit Suisse’s private banking clients?
JB: In addition to our Asia-focused impact solution, we are currently working on a bespoke solution in the education sector and a client group investment related to conservation in Indonesia and Malaysia.