Recently, South and Southeast Asia has been in the news for being the latest favoured destination of impact investing. Over 32% of annual growth in capital deployed by global investors for impact investments was seen in Southeast Asia. There is however a long journey ahead for the region in order to build excellence at scale and certain problems will need to be addressed.
Addressing challenges across Asia
While fund management is a tough business in all emerging markets, Asian managers face an extra share of difficult challenges which include building strong deal pipelines, operating efficiently across countries, and finding sizeable sources of fundraising.
Finding and developing a successful pipeline
Fund managers raise funds to invest in businesses and startups that yield success. Many businesses identified look good on the surface, but often issues are uncovered once looking under the bonnet, resulting in dead deals. The resulting lack of investible pipeline slows down the deployment process, reducing investor confidence. More importantly, shallow pipelines limit the choice of investments, potentially leading to compromised selections or overpaying, thus reducing the odds of strong returns.
Effective regional and global fundraising alternatives
As funds grow, managers need to seek multiple new channels for fundraising; they can’t rely solely on small local family offices and DFIs. The scalable path is to go to institutional investors, both locally and regionally. But these potentially lucrative fundraising options which enable managers to keep pace with Asia’s growth potential continue to be out of reach for many. Why? Because managers have not adopted global best practices that institutional investors expect.
Optimizing cost of doing businesses across countries
Within Asia, early-growth investments are often compelling based on valuations of the target companies but can be expensive to transact and manage, substantially depressing net returns. Challenges include dealing with opaque and fragmented laws, leadership capacity building, taxation complexity, and country specific regulatory frameworks. Most Limited Partners prefer to invest in fund managers that are domiciled in regulation friendly jurisdictions such as Singapore, further increasing operating costs for funds. These challenges are just the tip of the iceberg, but if addressed using regional and global best practices, it’s possible to find opportunities for outsized returns.
Lack of liquidity for fund managers
To-date a relatively small proportion of invested capital has been realised by nascent fund managers throughout South & Southeast Asia, particularly venture capital firms. As a result, they are sitting on illiquid portfolios with just paper gains to present. This hampers a fund manager’s ability to raise subsequent fund vintages. LPs in the current climate expect to see liquidity, not just paper gains, in earlier funds before they consider investing. Much of this is due in part to immature local capital markets and less M&A activity as compared to Western markets.
An integrated investor relations and conducive growth environment
Building deeper relationships with the later- stage investors or active acquirers is key. It’s vital to maintain consistent communications with concise information for potential investors or buyers. Formalizing communication initiatives and making them part of your business goals is beneficial. Consistency can be encouraged by building them into team’s KPIs. A dedicated team resource to manage key ecosystem relationships could also be valuable.
Another area of focus should be peer learning from other investors in the ecosystem. Since the emerging markets’ ecosystem is still relatively nascent as compared to established global markets, a peer-to-peer learning model is also particularly important. While fund managers work in silos to solve similar problems, having the opportunity to the leverage the experience of others will help them make smarter decisions.
Amar Odedra is the Regional Director for Asia at Capria, leading the organization’s efforts in the region from its Singapore office. He brings end-to-end asset management experience, starting from a fund’s operational launch, its capital raise, deal origination, through to driving portfolio exit negotiations.
Amar was previously a Director at Wavemaker Partners, playing a key role in the successful launch of an oversubscribed Southeast Asia venture fund, one of the largest of its kind. Prior to that, Amar served as Commercial Director at Augentius, during which he worked closely with PE, VC and mezzanine fund managers across Asia and Europe, with the launch of their funds.