IMPACT INVESTING IN ASIA
Accelerating Impact with Catalytic Capital
in partnership with
ABOUT
What is catalytic capital
Asia sees a growing number of untapped opportunities to support underserved populations, early-stage innovations, and underfunded sectors.
The Catalytic Capital Consortium defines catalytic capital as investment capital that is patient, risk-tolerant, concessionary, and flexible in ways that differ from conventional investment, with the ability to de-risk and mobilise additional investment from mainstream investors.
By deploying catalytic capital, funders and investors are able to ensure the additionality of their capital, address issues on the ground that are often aligned with their values, whilst at the same time achieve their return objectives.
It is well-placed to build proofs-of-concept and support the development of ground-breaking solutions which other funds might deem too risky.
CASE STUDIES
Catalytic capital in action
South Asia
Artha Impact
Deploying patient capital into early-stage high-impact businesses that focus on underserved communities, while also building the impact investing ecosystem.
North Asia
Merry Year Social Consulting
Investing upfront risk capital and crowding in other equity investors and acting as an intermediary bringing blended transaction structures to life.
AUSTRALIA
Tripple
Choosing between – equity, loans, grants, or a combination as part of a holistic approach to achieving impact through its portfolio.
DEPLOYING CATALYTIC CAPITAL
Investors in Asia
Catalytic capital investors target underserved populations and markets in high-risk sectors, such as climate action, food and agriculture, education, livelihoods and inequality.
Impact Investors
Private Wealth Holders
Development Finance Institutions (DFIs)
Public Sector
Mainstream Financial Institutions
Corporate Foundations and Corporate Social Responsibility (CSR)
Impact Investors
In the last two decades, a number of specialist impact investors such as Crevisse, a South Korean impact investing firm and ResponsAbility based in Germany and investing in Asia, have played a role in deploying catalytic capital. Driven by their organisation’s mission, they have provided capital to early and mid-stage investees. These impact investors often blend financing from a range of sources and create new products and funds seeking to fulfil unmet needs.
Private Wealth Holders
High-Net-Worth Individuals (HNWIs) have the flexibility to direct their resources and risk tolerance toward supporting innovative solutions and providing below-market-rate finance. However, many HNWIs continue to consider their philanthropic capital and investment capital as separate and have yet to see the role they can play in deploying catalytic capital. Similarly, family offices are a relatively new phenomenon, existing predominantly in Singapore, Hong Kong, Taiwan and China. Most are not yet advanced in their strategic development.
Development Finance Institutions (DFIs)
DFIs are prominent actors in the catalytic capital ecosystem in Asia, similar to other developing regions.
Historically, DFIs have deployed catalytic capital by participating in blended finance transactions. As of 2019, 75% of global blended finance deals involved at least one DFI. However, research suggests that only a portion of the blended finance transactions by DFIs and multi-development banks (MDBs) plays a catalysing role, and some appear to take less risk and be less catalytic than they could.
This has led to questions about how private wealth holders, social investors, and DFIs should collaborate. On some occasions, private wealth holders may catalyse DFIs, while some maintain that DFIs should do more to catalyse more commercial pools of capital, given their abundance of resources.
Historically, DFIs have deployed catalytic capital by participating in blended finance transactions. As of 2019, 75% of global blended finance deals involved at least one DFI. However, research suggests that only a portion of the blended finance transactions by DFIs and multi-development banks (MDBs) plays a catalysing role, and some appear to take less risk and be less catalytic than they could.
This has led to questions about how private wealth holders, social investors, and DFIs should collaborate. On some occasions, private wealth holders may catalyse DFIs, while some maintain that DFIs should do more to catalyse more commercial pools of capital, given their abundance of resources.
Public Sector
Government agencies recognise the potential of catalytic capital to crowd in third-party investment. Public funding however is often accompanied by conditions and requirements that impede certain impact enterprises from receiving funding.
- Korea International Cooperation Agency (KOICA) or blended financing platforms like PT Sarana Multi Infrastruktur (PT SMI) in Indonesia, have played a significant role in catalysing private capital by providing credible structures and frameworks to manage and mitigate risk and returns.
- The United States Agency for International Development (USAID) and the Government of Canada also play a significant role, providing capital on concessionary terms to projects across different sectors in Asia including fisheries and climate.
Mainstream Financial Institutions
Mainstream financial institutions such as banks, pension funds, and insurance companies seldom deploy catalytic capital. Impact investing deals are often at a smaller scale than these major institutional investors can engage with.
- Singaporean bank DBS teamed up with Impact Investment Exchange (IIX) to jointly launch the Women’s Livelihood Bond, along with USAID and Australia’s Department of Foreign Affairs and Trade (DFAT). It guarantees 50% of the loan portfolio’s principal. It is now in its second tranche and aims to support one million women in Asia with sustainable livelihoods.
Corporate Foundations and Corporate Social Responsibility (CSR)
Currently corporations and corporate foundations are yet to be engaged in the deployment of catalytic capital. However, there have been shifts in the regulatory environment that could enable their future engagement.
- In India, all companies above a certain profit threshold (INR 50 million, USD 616,000) are required to spend at least 2% of their average net profits of three years on CSR-related activities. Some of this capital is starting to flow in the direction of a blended model where CSR resources can play a catalytic role.
- In South Korea, there is no equivalent to India’s CSR law, but large corporations have started to become involved in catalytic investments usually through their corporate foundations.
DEPLOYING CATALYTIC CAPITAL
Roles that investors play
Catalytic capital investors are driven by motivation to bring additionality and support innovations that others might be hesitant to fund. Investors can play different roles with their catalytic capital, depending on the kinds of gaps that exist, and what is needed to address them.
Seeding
Capital is directed towards building new sectors, attracting talent and forming markets. It involves a high level of risk and uncertainty.
Scaling
Capital is used to help grow businesses so that they can attract wider interest. This role is for investors looking to bring in more money from elsewhere.
Sustaining
Capital is deployed as an ongoing concessional investment required by enterprises that cannot achieve full commercial viability.
DEPLOYING CATALYTIC CAPITAL
Structures and instruments
Investors and funders in Asia use different structures and instruments in deploying catalytic capital. Choosing the right instrument requires a strong assessment and understanding of the needs of the investee organisation, alongside ensuring that investees’ financial needs are aligned with the resource providers’ own investment objectives.
Debt
Equity
Guarantee
Social Finance Tools
Debt
Subordinated or junior debt can attract more senior partners by reducing the cost of capital, thereby changing the risk/return ratio for commercial investors. Some lenders are more patient than others and offer lower interest rates. Others have adopted a model of collecting interest and returning it as a grant. Some investors are experimenting with ‘recoverable grants’, a giving strategy which might look like a loan, that allows for charitable capital to be recovered.
- The &Green Fund, an impact investment fund financing sustainable commodity production, is an example of a debt fund which offers subordinated loans under flexible terms to bring in other investors. It finances projects which may be considered high-risk in tropical forest regions in Indonesia and other parts of the world.
Equity
Often concessional, invested in enterprises with limited track records and taking a subordinated position designed to absorb losses before other investments. In several family offices, grants are also deployed in combination with equity and debt, across multiple investments within their portfolios. They treat investments and grants as complementary rather than separate.
- Investments made through the Artha Venture Challenge (AVC) are an example of this. As part of the AVC, Rianta Capital, matched investments raised by viable social ventures, which catalysed investment into key sectors across India by building collaboration among investors and improved investment terms for social ventures. In this way, some equity investors take on more risk, going where others don’t tend to, while others are willing to accept a dividend cap which allows greater returns to accrue to other investors. Read their case study here.
- Other investors, such as Patamar and Crevisse, look for above-market returns alongside high impact. They do this by supporting mission-aligned entrepreneurs through their incubator programme, building the capacity of impact enterprises to accept follow-on investment, therefore scaling both financial return and impact.
Guarantee
Guarantees can help provide the security for other capital to flow.
- Guarantees provided by U.S. International Development Finance Corporation (DFC) for ADM Capital’s Asia Secured Lending Facility, covered a percentage of any losses from the fund.
- Meloy Fund was supported by a partial guarantee from the US Development Credit Authority (DCA).
- The Sarulla Geothermal Power Project, which is part of the Indonesian government’s push to reduce their dependence on crude oil and produce alternative energy sources leveraged a risk guarantee from the Japan Bank for International Cooperation and a 20-year Business Viability Guarantee Letter from the Indonesian government, alongside investment from Asian Development Bank (ADB), to help crowd in commercial funding.
Social Finance Tools
There has been a strong interest over the last decade in outcomes-based contracts, also known as results-based financing or pay-for-success models. Moreover, catalytic capital can also be an element of a blended finance structure, where the capital is deployed vertically within a capital stack with the financing it seeks to leverage.
- Launched in 2021, Social Impact Guarantee (SIG) is a results-based financing mechanism that increases employment and education among youth at risk in Singapore. It functions similarly to a money-back guarantee – if the programme does not achieve the social impact outcomes it committed to, a third-party guarantor will reimburse the funder. In exchange, the guarantor may take a small premium payment. SIGs require no modifications to existing funding processes, and the final step effectively works like an insurance policy.
CHALLENGES AND BARRIERS
Key challenges
Investors and funders have to overcome challenges on several fronts when deploying catalytic capital. Many of these relate to the practice being emergent but are notable nonetheless.
Deploying catalytic capital in a blended structure can be costly. Transactions such as impact bonds have little to no precedent. Investors must navigate legal, regulatory and accounting standards themselves, adding to the administrative complexity and cost.
It can also be challenging to clearly identify the risk-reward ratio borne by different parties in blended transactions. Commercial investors often do not see eye-to-eye with catalytic capital providers on deal size and the scale of transactions.
Governance issues can be a hurdle for those ready to deploy catalytic capital. Many investors have investment arms outside Asia, and it can be difficult to find staff in the markets of interest with the appropriate expertise to manage transactions.
Moreover, Asian private wealth holders and asset owners often follow a “two pockets” concept, with one pocket of money set aside for investment and the other to “do good.” Each pocket is distinct, and while blending is a growing practice, it is still rare.
Given the experimental nature of catalytic capital deployment in the region, the size of the transactions might be smaller than mainstream or large institutional investors require, which could be over USD 100 million. On top of this is the inherent risk of failure when embarking on an untested approach.
It can also be challenging to clearly identify the risk-reward ratio borne by different parties in blended transactions. Commercial investors often do not see eye-to-eye with catalytic capital providers on deal size and the scale of transactions.
Governance issues can be a hurdle for those ready to deploy catalytic capital. Many investors have investment arms outside Asia, and it can be difficult to find staff in the markets of interest with the appropriate expertise to manage transactions.
Moreover, Asian private wealth holders and asset owners often follow a “two pockets” concept, with one pocket of money set aside for investment and the other to “do good.” Each pocket is distinct, and while blending is a growing practice, it is still rare.
Given the experimental nature of catalytic capital deployment in the region, the size of the transactions might be smaller than mainstream or large institutional investors require, which could be over USD 100 million. On top of this is the inherent risk of failure when embarking on an untested approach.
A core ecosystem challenge is the lack of channels for investors to identify allies and opportunities to co-invest. The absence of architecture that connects all the stakeholders in Asia preserves silos.
Data and research on investment performance is hard to find in Asia. Impact measurement and management is still a nascent discipline globally with few incentives to adopt common standards. This is apparent in Asia, and can be attributed to the complexity and resource intensiveness of impact measurement: according to one intermediary, impact measurement for an impact bond can cost up to 10% of the deal size.
There is also insufficient transparency on deal terms and actors even though most would agree on its value. In some countries in Asia, it is clear that fiscal frameworks and regulatory restrictions are often inconsistent, unclear and impede the deployment of catalytic capital. For example, in Australia, there are regulations that demarcate the fiduciary duty of foundation trustees, and similarly, in Hong Kong, the Inland Revenue’s approach to charities limits the activities for which the charity can use its funds to ensure its charitable status. Tax regimes can also be challenging when cross-border activity occurs, especially when philanthropic partners are tax-exempt in certain jurisdictions.
Whether the issues are around financial laws, charity laws or foreign capital laws, wealth managers may need to set up different vehicles to navigate the relevant regulatory environments. This again adds to complexity and cost. In many cases, particularly in emerging economies, the complex policy infrastructure leads wealth managers to focus their time on market prospecting and building a pipeline of companies.
Influencing public policies and regulations is seen as complicated because investors do not have the capacity to do so. Governments are constantly shifting priorities, while many laws in the region limit the scope of nonprofit organisations in political and advocacy work.
Data and research on investment performance is hard to find in Asia. Impact measurement and management is still a nascent discipline globally with few incentives to adopt common standards. This is apparent in Asia, and can be attributed to the complexity and resource intensiveness of impact measurement: according to one intermediary, impact measurement for an impact bond can cost up to 10% of the deal size.
There is also insufficient transparency on deal terms and actors even though most would agree on its value. In some countries in Asia, it is clear that fiscal frameworks and regulatory restrictions are often inconsistent, unclear and impede the deployment of catalytic capital. For example, in Australia, there are regulations that demarcate the fiduciary duty of foundation trustees, and similarly, in Hong Kong, the Inland Revenue’s approach to charities limits the activities for which the charity can use its funds to ensure its charitable status. Tax regimes can also be challenging when cross-border activity occurs, especially when philanthropic partners are tax-exempt in certain jurisdictions.
Whether the issues are around financial laws, charity laws or foreign capital laws, wealth managers may need to set up different vehicles to navigate the relevant regulatory environments. This again adds to complexity and cost. In many cases, particularly in emerging economies, the complex policy infrastructure leads wealth managers to focus their time on market prospecting and building a pipeline of companies.
Influencing public policies and regulations is seen as complicated because investors do not have the capacity to do so. Governments are constantly shifting priorities, while many laws in the region limit the scope of nonprofit organisations in political and advocacy work.
Despite progress over the last decade, market information remains limited, making it hard for investors to identify quality investable impact-first companies with the potential to scale. This lack of pipeline is evident in different parts of the region, with a majority of social enterprises in Southeast Asia yet to report a profit in the past year and only 10% of Indonesian social enterprises having been identified as investable in research conducted in 2017.
Enterprises also face challenges in proper bookkeeping and generating financial projections – the minimum documentation required for investments. This is made worse in certain markets where social enterprises do not even have a way of legally registering their entities to reflect their unique operating models. Impact-first social businesses can also encounter societal stigma. In Hong Kong, for example, consumers can perceive product offerings to be of lower quality than those offered by conventional businesses.
Enterprises also face challenges in proper bookkeeping and generating financial projections – the minimum documentation required for investments. This is made worse in certain markets where social enterprises do not even have a way of legally registering their entities to reflect their unique operating models. Impact-first social businesses can also encounter societal stigma. In Hong Kong, for example, consumers can perceive product offerings to be of lower quality than those offered by conventional businesses.
WHAT'S NEXT
Learn how you can effectively deploy catalytic capital in Asia and beyond
Connect with fellow investors at catalytic capital sessions at the AVPN Global Conference 2023
Uncover insights from catalytic capital investors around the world in our global webinar series.
Resources
Get more insights about catalytic capital
Reports & Guidelines
Advancing Practice In Catalytic Capital Guidance Note 1 | The Seeding Role
Advancing Practice in Catalytic Capital Guidance Note 2 | The Scaling Role
Advancing Practice in Catalytic Capital Guidance Note 3 | The Sustaining Role
Impact Investing in Asia: Overcoming Barriers to Scale
DFIs deploy catalytic capital
Frequently Asked Questions About Catalytic Capital
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From the Networks
Catalytic capital: the big picture | Alliance magazine
Impact-Linked Finance As Catalytic Capital (video) | AVPA – African Venture Philanthropy Alliance
Catalytic Capital | EVPA
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The Global Voice: Reflection & Insights
Catalytic Capital in 2022: Expanding the toolkit to crowd in capital for impact
Lessons for harnessing the power of catalytic capital from a growing community of practice
Risk-averse development finance institutions are more often catalyzed than catalytic
Beyond the fairy tale: Investment strategies that catalyze real impact | ImpactAlpha
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