Impact Investors in Asia: Characteristics and Preferences for Investing in Social Enterprises in Asia and the Pacific

By Asian Development Bank

This report provides insights to investors keen to invest in the region, financial intermediaries that advise social enterprises (SEs) on capital raising, and developers of platforms seeking to connect SEs in the region with impact investors. Impact Investment Exchange Asia (IIX), an SE based in Singapore, is applying the final outputs of this research as it finalizes the operating features of Asia's first social stock exchange, which it is creating. The outputs of the research will also aid policy makers and institutional actors to better understand and foster an environment for sustainable development through impact investing.

• Language: English
• Publisher: Asian Development Bank
• Release date: Nov 1, 2011
• ISBN: 9789290924678

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Impact Investors in Asia

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

Background

Impact investing has emerged as an alternative asset class that channels large-scale private capital into addressing the world’s most pressing social and environmental challenges. J.P. Morgan estimates that the impact investment market has the potential to absorb between US$400 billion and US$1 trillion over the next decade, even when only including five sectors (housing, rural water delivery, maternal health, primary education and financial services) in the analysis.³ While foundations, development finance institutions and ultra-high net worth individuals have been the traditional pioneers in impact investing, there is a large supply of untapped impact investment capital among individuals and institutions that can help to meet this investment demand over the coming years. Our hypothesis is that the development of a social stock exchange serving SEs in Asia and the Pacific can help to unlock this supply of impact investment capital.

The capital markets can play a critical role in sustainable, economic development in Asia. 753.5 million people in Asia and the Pacific region live on less than US$1.25 per day, and approximately 63% of the world’s poor population (defined as living on less than US$2 per day) live in Asia.⁴ Possessing huge growth potential in Asia, sustainable SEs are uniquely positioned to address a wide range of economic, environmental, health, and social challenges.

Though a large number of innovative SEs address a myriad of social and environmental challenges throughout Asia, a disconnect prevails between the supply of impact investment capital from impact investors and the demand for growth capital by SEs. This disconnect is presently curbing SE growth and inhibiting the inherent potential of leveraging market-based capital for social impact. The disconnect arises from the lack of information about the availability of impact investment opportunities in the region as well as the difficulty and high due diligence costs incurred in accessing such opportunities; the high perceived risk associated with impact investments, especially in emerging markets; and the potential illiquidity of investments in SEs and limited range of exit options for investors. This disconnect also arises from the lack of standardized impact measurement and reporting as well as from a mismatch, in many instances, between investors’ and SEs’ expectations for financial returns on impact investments.

A regional social stock exchange may be able to reduce this disconnect of supply and demand by addressing these issues. In particular, a regional social stock exchange could improve access to and reduce due diligence costs for investment opportunities in SEs; offer a variety of investment products that may mitigate risks; improve liquidity in impact investments; improve transparency by establishing standardized reporting for social and environmental impact; and engaging market intermediaries and encouraging stakeholder participation.

IIX and its not-for-profit affiliate, Impact Investment Shujog (Shujog), are playing a critical role in the development of Asia’s first social stock exchange. Recognizing that there is a need to build up the capacity of SEs in Asia so that they can effectively absorb growth capital, Shujog focuses on capacity-building, advocacy, research and education related to the SE sector in Asia and the Pacific. In order to facilitate private capital raising by SEs in Asia and the Pacific, IIX launched Impact Partners in March 2011, serving as Asia’s first private placement platform connecting SEs and impact investors.

Survey Methodology

The project entailed surveying, sampling, and interviewing investors across the globe in order to understand their investing activities in Asia and the Pacific region. The survey contained 41 questions and was distributed to a wide range of investors, which included individuals and institutions, in Asia and the Pacific and around the globe. Individual investors targeted included individuals with a wide range of incomes and assets, ranging from retail investors to ultra-high net worth individuals. Institutional investors targeted included both traditional investors as well as institutional investors focusing on impact investments. The survey received 70 responses.

Key Findings

1 The results show that investors (across all of the groups surveyed) are willing to increase their involvement in impact investing over the next few years (subject to the development of appropriate market infrastructure). This is true for those already engaged in impact investing and those who are not yet. The expected increase in investment should lift all regions of Asia and nearly all sectors.

2 In order for this potential increase in impact investment to be realized, there are a number of prerequisites that must be met. The most frequently cited prerequisites to increased impact investing were increased information about the availability of impact investing opportunities, and easier access to impact investment opportunities. In addition, investors expect to diversify the methods and types of instruments they use to make impact investments. Investors also expect to increase the amount of investment in public equities and liquid debt, as well as their investment through funds and indirectly through advisors. Overall, the impact investment market can be expected to evolve from one dominated by direct investments in private securities to one in which indirect investments and liquid securities play a larger role.

3 A large majority of respondents are in favor of the development of a social stock exchange, and a large majority of respondents say they would actually transact on it. The most cited reason for transacting on a social stock exchange is the ability to realize both social and financial returns. Certain types of investors also cite it as a useful mechanism for exiting their current investments. Some of the most important perceived benefits of a regional social stock exchange include increased liquidity as well as increased transparency of both social and financial information.

4 One of the key attractions of a social stock exchange to investors is the desire to achieve social returns.⁵ With this in mind, it is not surprising that the vast majority of respondents believe it is important for