Conversation with SA Capital: How Private Equity Investing Improves Education f

Interviewee: CEO and Partner of SA capital, Richard S. Roque

CASVI: Why did you participate in impact investing? What changes have you felt in recent years of practice?

Richard: I had spent most of my career in the traditional financial field. In 1987, I moved from Singapore to Hong Kong because the headquarter of the company which I was working for moved here. Later I switched from banking to the private equity field. I joined a family investment office founded by the former U.S. Treasury Secretary William E. Simon and invested in targets mainly in East Asia with myself based in Hong Kong. William E. Simon passed away in 2000, and his family decided to put their focus back to North America in 2006 and I, therefore, spun off the Hong Kong business, which was the basis for SA Capital’s subsequent growth.

Looking back to my experiences, I had been working for the Hong Kong Venture Capital and Private Equity Association in the 1990s. At that time the venture capital industry was just getting started and I often went to mainland China. And it was amazing to see how quickly VC and PE were growing in China. Now venture capital and private equity investing in mainland China have grown dramatically compared to that in the 1990s. And perhaps impact investing will also experience such dramatic growth in the future. Who knows?

In addition to my private equity background, I was involved with an educational charity in Hong Kong, which managed a secondary school, a primary school, and a kindergarten in Hong Kong. This was the starting point for my interest in impact investing in the educational field. And the real catalyst for me to pursue impact investing was a conference hosted by Cyberport in 2008 when I met Kevin and Tim, founders of Good Capital which was one of the earliest impact investors. They introduced to me the concept of impact investing. The 2008-2009 financial crisis, made one reconsider the great problems that could arise when people focused only on making a lot of money but neglected the common good. This led me to think more about participating in impact investing as a way to leave a worthy legacy behind and contribute to making the world a better place.

As an entirely new way of investing, impact investing is clearly very different from traditional investing since the focus is on both a financial return and positive impact and requires a system-wide approach. After 12 years, I still think it's not an easy thing to do. The good news, however, is that I see more and more people show their interest in this area, including the involvement of large institutions with hundreds of millions of international assets, such as KKR and TPG, which is a good sign. At the same time, I believe that the whole methodology and theoretical system of impact investing must be different from that of traditional venture capital. For example, people now emphasize impact results or measurable outcomes aside from financial results. Although we are still in the early days of the industry, these changes above can and should be transformative.

CASVI: What is your understanding of the role of impact investing? What is the mission of SA Capital?

Richard: For the companies, they should focus on solving the market pain points. And the largest pain points for the global market are sustainable development goals. In some areas, giving and philanthropy are more appropriate solutions to problems. But in many other areas, such as health, education, work, and improving the lives of workers, there are opportunities for impact investors to enter. I believe that impact investing can really make a difference in achieving the 17 Sustainable Development Goals (SDGs) raised by United Nations. It brings in capital, expertise, and a systems-wide market-based approach to solve these problems.

Impact investing means that people need to have a new vision for the ecosystem, bringing in the right partners and the right technological innovation elements.

In practice, my view is that unless an institution is very large and has a lot of resources, investors should be focused on a few goals. At SA Capital, we focus only on the fourth and eighth SDGs, quality education and decent work & economic growth. To some extent, the two are linked. Overall, I think impact investing can play an appropriate role directly in education because education is really in line with the dual goals of impact investing. First, education often requires good planning, and people are willing to pay more for quality education. What really matters behind this is how to adjust business models to scale impact, such as making education more inclusive through technological innovation, which I think is a key theme. Second, education can enrich individuals and enable them to flourish individually. As the Chinese proverb goes, "It is better to teach people how to fish than to give them fish directly." The real impact is to put people at the center so that they can achieve their potential and their individual dignity.

CASVI: Implementation of impact goals is a complex process. What are the insights of SA Capital in practice?

Richard: An impact investor should first choose a more familiar area to invest in, which involves two areas of work. Investors, on the one hand, want to find leverage to create greater impact. On the other hand, they want to control risk. And the more familiar they become with a particular area, the less risk they have, making it possible to generate the desired impact with achieving financial returns.

In my view, there are two different types of impact investees. One is the British-originated, community-driven, and small & beautiful social enterprises. Another is enterprises focusing on scaling operations. Both models are important, but ultimately, for impact investors, scaling up can help create more impact, and it will also help in the search for appropriate exit options in the future. Therefore, investors will want to see how big the business market associated with the project itself is, how great the potential to make a new project is, and whether it has a comparative advantage over other projects. My feeling is that many times it is difficult to find high-quality investment deals. And we look for social entrepreneurs with a grand vision and good execution skills. Some other countries may have more of this kind of entrepreneurs, but our market still needs to inspire more people to join the field. In Hong Kong, where many social entrepreneurs have an NGO background, it is not explicit to see them using innovation management and integrating this in their projects, which is a disadvantage. I hope that people with more business experience will also support such projects.

Some of the successful social entrepreneurs in mainland China can bring some young people into the team and use the venture capital model to solve important social problems. I believe that the elimination of obstacles to development in the field will require presenting more cases of social enterprises successfully achieving both profitable and sustainable goals as well as showing how it affects people’s lives. Put another way, I think people need to recognize that impact outcomes themselves have good business value in some cases and that achieving both sustainability and reasonable financial returns is a better model.

CASVI: What are the biggest challenges of investing in social enterprises?

Richard: Making impact investments or investing in social enterprises can take a lot of time because the biggest challenge facing people is overcoming some of the legacy issues. The historical legacy framework has hindered the development of new things, so what some social enterprises want to do is difficult to scale up. In the field of education, for example, we are working to develop a new way of assessing exams based more on the overall performance of a student — not only his or her knowledge but also his or her ability to put knowledge into practice. We believe that a person with this ability should be able to be identified and win in the education system. But there are many obstacles to overcome. For example, this system needs a very enlightened group to make universities accept this new way of screening the talents and needs future support from the company to prove that the talents selected in this new way can indeed perform better in the work. This is just a small example. Investors in different areas will encounter different legacy problems.

CASVI: What is your view of the Chinese market? What changes have you felt over the past few years?

Richard: I am glad to see that now more people in China are talking about the concept of impact investing, and there are more accelerators. I still remember that five years ago, China had already carried out a lot of relevant training. There were also some good initiatives, which were important to building the ecosystem. As far as I am concerned, it is always better for local impact investors to lead and originate impact-driven projects in China: first, because of the need to work with government officials at times, and local investors can do more in a faster and more efficient way. China presents impact investors with the advantage that it has a huge market and great opportunities for growth and to develop ways to scale solutions on a large scale, based on which it will be easier to exploit the international market by using lessons learned in the Chinese market.

In addition, I think it is also meant to introduce cooperation and innovation from overseas investors into the Chinese market. For example, one of the investments we made is closely related to Sustainable Development Goal 8, which is to help improve the lives of workers. This project focuses on workers in China's factories, which typically serve multinational companies that need manufacturing services. The company we're investing in has developed an application that allows factories to automate human resource management online and make it easier for workers to apply for vacation and get information about training, benefits, and more. That's part of the education landscape we're building for online learning. My observation is that applying technology developed outside of China to the Chinese market and then exporting that experience to other countries – such as Southeast Asian markets – would be an ideal model. This is true for online learning and education. And there are many similar possibilities in other areas such as circular economy and health.

CASVI: How does SA Capital find investors in China (including Hong Kong) where most investors value financial returns more and regard value created by impact only as an added value?

Richard: In the beginning, I worked with a group of financial professionals, mostly in banking and private equity. We shared the same passion for building an ecosystem of impact investing so they could become investors or bring in new ones. To some extent we are pioneers, so it is not easy to find investors. But the encouraging thing is that the market has been moving forward, and there are more people considering joining.

I feel that there is still a big obstacle in the Chinese market.

People often think that doing good and doing well can't be done at the same time. I think CASVI will also play a very significant role in this transition and continue to study the different models in practice. I believe that eventually, we will find the right path to combine all the goals together.

CASVI: How do you measure and manage the impact?

Richard: What we can do about impact measurement is relatively limited, which is still in the process of development. At the same time, we do not want to cause too much management burden for investee enterprises. For example, we invested in one enterprise that gives students "loans" in the form of investments. Students don't have to worry about paying back the money they receive because it can be seen as an uncontracted investment based on the principle of future income sharing. After investing, we provide guidance to students, which is like adding value by empowering businesses and entrepreneurs as an investor. We hope these investments will transit into a good job after students’ graduation. And then they would enter the stage of sharing. In such investments, the impact indicators we consider include the proportion of students who receive “investments” each year that come from families that for the first time have a son or daughter in a tertiary institution of higher education (universities or vocational and technical colleges). Of course, we can dig a little deeper in this area, but we haven't reached that stage yet.

CASVI: How does SA Capital exit its investments? What was the result?

Richard: We have exited some investments. Overall, because some projects did not reach the maturity stage we originally expected, there was still potential for financial returns and impact returns. Moreover, since most of our investments were structured in convertible debt, as investors we had guaranteed minimum financial returns. And real returns were higher than bank returns, which were good, but not at a high level. Looking back, we feel that bringing projects to maturity did take a lot more time. As pioneers in this industry, we must also go through this relatively long process.

Now there is a growing number of business enterprises trying to integrate sustainability goals into their business strategies and become, in a sense, mission-driven. How do you see the underlying meaning of this direction for impact investing?

I agree that this is a good way. Business enterprises show great efforts by doing this, but what I worry about is the corporate culture.

While changing business strategy, the company's own culture must also embark on a path of change, which can only be done with a mindset change against the original inherent culture.

To this end, we support a capacity development organization that promotes the Virtues Leadership system to facilitate this transformation beginning with the C-suite.

At the same time, I agree that a new corporate structure or corporate form may be needed. Not only in Hong Kong but also in mainland China and in the corporate world in general there should be different forms of companies. For example, a company can choose to become a B Corp or other more responsible types of companies. These new forms of business need to assure that the company is responsible not only to its shareholders but also to other stakeholders. I think eventually we will find a new model that fits the impact stakeholder-oriented business model. We haven't reached that stage yet, and different countries are exploring various alternatives. What we really need is a form of business that is both mission-oriented and stakeholder-oriented.

The essence of all the discussions about social enterprises is how to execute innovation including social innovation in the form of a company.

Traditional firms are based largely on profits and shareholder capitalism, which has been around for more than 200 years. But we have now seen a new wave of new corporate initiatives, called stakeholder capitalism, which is embraced by some of the world’s largest companies and fund managers. This is a sign that the broader environment is moving in the right direction. And the trend is fully in sync with the need for companies to switch to innovation and new business models.

From a deeper and more extreme point of view, people also need to think about what the fundamental purpose of business is. I might argue that “mission-driven business” points to “human flourishing”. Because what such businesses really need is a model that allows all stakeholders to thrive, and the shared human flourishing and the common good is the goal of all.

CASVI: How could more Chinese market participants get motivated to enter the field of impact investing? What are your expectations for the future?

Richard: I think more promotion of successful social business models is a great way to attract and encourage more people to think about the feasibility of such models. Besides, people could be guided into the field of impact investing through ESG investing. There is a growing number of large domestic fund managers who have begun to participate in ESG investing. I think some of China's larger funds may consider doing impact investing in the future. Also, there are other encouraging trends in the VC world that are converging with impact investment such as Deep Tech investing that is focused on addressing the biggest problems in the world within the SDGs.

The market is just getting started. And I hope the model will be getting better. A few years ago, I was very worried. There were people around me who thought impact investing would help them make a lot of money, but in fact, it was a completely different way from traditional investing. The highest virtue of Chinese Confucianism is benevolence, an element that should also be included in future investments that will promote harmony among different stakeholders. I believe that there will be more high-net-worth Chinese people, families, and funds interested in contributing to society through impact investing.