Impact Investment Funds for Frontier Markets in Southeast Asia

Asia is home to some of the world’s busiest trade routes and manufacturing centers, as well as over half the world’s population. The next billion consumers in the global economy will be mostly in Asia, and the spending of its middle class is bound to rise in the next 20 years from about US$4 trillion to more than US$30 trillion, or about 42 percent of worldwide consumer spending. Many developed countries are looking toward Asia for buyers of their exports, and to establish factories and other commercial operations.¹ The economic significance of the continent is undoubted.

Investors increasingly look beyond the prospects of simply collecting financial returns. They want to do something worthwhile with their investments, and are even willing to forgo a small portion of profits to make sure this is the case. To meet this growing demand, investment banks are beginning to set up socially responsible investments (SRI) and impact investment funds for their clients. Projects satisfy impact criteria when they involve positive social or environmental change, regardless of their economic or political environment. Because they also require a return on investment, they inhabit a different paradigm from donations or aid programs. To clarify what exactly impact investment entails, we will establish a definition of the investment strategy as most academics and practitioners understand it.

Southeast Asia consists of the following countries: Brunei, Cambodia, East Timor, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand, and Vietnam. All of them except East Timor are part of the Association of Southeast Asian Nations (ASEAN), which results in 99.8 percent of the population of Southeast Asia being ASEAN members. We therefore use the terms Southeast Asia and ASEAN to describe the same in this book. Nevertheless, the region is far from homogenous.

Most professional investors such as institutions, high-net-worth individuals, endowments, and family offices wish to have international diversification and exposure to emerging and frontier markets in their portfolios. When countries depend on growth in different economies with different activities and consumption patterns, this leads to less than perfect correlation of their economic performance. Investing in several uncorrelated countries thus reduces risk in a portfolio. But this is not the only reason for exposure to frontier markets. Fund ma nager Mark Mobius, who oversees more than US$40 billion in emerging-market assets at Franklin Templeton Investments, believes frontier markets represent what the BRICS countries were 20 to 25 years ago.¹ They offer growth prospects for the future when established markets may stagnate. Investment professionals such as Mobius have sought exposure to frontier markets for a long time. It is only recently that retail investors have access to these markets as well. Frontier markets offer attractive long-term prospects to global investors. However, most currently available retail investments lump all frontier markets together and exclude most of those in the ASEAN. In reality, frontier markets are diverse. Their cultures, people, and languages differ, their economies and available resources also vary widely. As a result,

Beyond their advantages of natural resources and demographics, the four frontier economies of Southeast Asia could benefit from an inflow of foreign capital to strengthen their economic capacity, which could introduce network effects for sustainable growth into their development agenda. Capital should be accessible to a broad base of the population, not just the elite who controls access to natural resources. At the same time, those who receive capital should adhere to financial standards and transparency. Motivated social entrepreneurs will therefore have a chance to prove they can allocate investment capital efficiently. Impact investment may be the ideal technology for this purpose.

Several concerns and investment risks exist that make the value proposition of impact investment in the frontier countries of Southeast Asia less inviting. Overlaying impact investing with this particular region unites two hot topics: Because the investment strategy is relatively new with only a sparse track record, little experiential data about financial returns exist. Frontier market investment, on the other hand, has a longer history, but has been a risky specialist domain mostly reserved for professional investors, as we have seen in Chapter 3. Even though it seems straightforward in theory, impact investment has many facets. It is hardly a household term and requires thorough explanations and disclosures for investors, investees, and regulators.

Because they are less developed than the emerging markets of the region, relatively modest amounts of capital can have a substantial social and environmental impact in the frontier countries of the ASEAN. At the same time, their economic growth prospects look promising. The IMF predicts strong average nominal GDP growth of over 7 percent with a standard deviation of less than 1 percent for the ASEAN frontier (Figure 6.1 and Table 6.1) in the coming years.

Impact investment offers exciting opportunities for the frontier countries in the ASEAN. It also holds promise for private and institutional investors. The investment strategy is distinctly different from traditional nonprofit finance, and from conventional investment, as it aligns financial returns with social and environmental impact. Few financial professionals and policy makers focus on this emerging field. It is a specialist domain, with a need for qualified financial professionals. However, the market for impact investment promises to evolve in the foreseeable future, with large gains for investors and host countries on the horizon.