Interviewee: Ong Pei Yeing, Chief Investment Officer of DVF Impact holdings
CASVI: Why did you join the field of impact investing?
Ong Pei Yeing: Strictly speaking, I got involved in impact investing when I joined UOB Venture Management. At the beginning of 2014, UOB Venture Management and Credit Suisse AG launched the Asia Impact Investment Fund (AIIF), the first impact investment fund in this region. And I was responsible for impact investments in China. However, the reason why I was invited to this fund dates back to 2004, when my knowledge of the Chinese market started to accumulate as I was in charge of mergers and acquisitions for some listed Chinese companies. I acquired deeper knowledge in the Chinese agriculture and food industry sector as one of my customers was the Taiwan Uni-President Enterprises Corporation. Since the AIIF is an impact investment fund aiming at sustainable development and poverty alleviation, its target beneficiaries are farmers. My knowledge and experience in the field of agriculture could be utilized in AIIF, and since then I officially joined the impact investing industry.
CASVI: What are the differences between traditional VC and impact investing GP in the way of value creation?
Ong Pei Yeing: The most salient difference is the process. In general, standards are set on the outcome of both investments. Compared with traditional investments, impact investments should generate social impacts besides financial returns. Thus, the difference in goals for outcome between traditional VC and impact investing makes the process of value creation different.
I think these differences are more salient in China. First, we find that industries with impacts are not the mainstream, which are often overwhelmed by mainstream investing trends. If you look at the Chinese listed companies, there might be only 30% of them in the agriculture industry. And the overall capital market has low expectations towards agriculture. Even the auditors in Big 4 are very concerned when invited to work with an agricultural company. In other words, agriculture is marginalized or even ignored field. However, the greatest difference between traditional investments and impact investments is that once we decide to devote ourselves to one mission, we will never give up and help enterprises, despite whether they are currently the most popular industries.
The second difference is that we need to provide value-added services and spend lots of time and effort in investment portfolio management. Compared with that of traditional VC, the outcomes of impact investing, do not depend solely on a successful IPO.
Impact investing focuses on managing investment portfolio and cultivating teams which will put importance on the management process. Thus, the process of impact investing is much more important than that of traditional VC.
CASVI: How do you see the current development stage of impact investing in the Asian market? What is the difference between the Chinese market and other Asian markets?
Ong Pei Yeing: The AIIF that I previously worked for is targeted at China and Southeast Asia. Thus, we look at these two as a whole. In terms of product design, AIIF is an ideal outcome of diversified portfolio investment management. For instance, we encountered some policy difficulties in China which did not exist in Southeast Asia; and some weaker segmented markets in Southeast Asia developed better in China. Therefore, from the perspective of portfolio investment, there was a sound balance.
However, from the perspective of market structure, these two regions are independent, meaning that their characteristics are totally different. My personal view on the development of the Chinese impact investing market is that China should ultimately invest based on its wealth accumulation so that the relatively weaker groups and less developed regions can catch up. The Southeast Asian market is different. There are still many frontier markets such as Burma and Laos, and they may continue to accept external support from international development finance institutions in the short to medium term. It will take a long time for developing regions such as Indonesia to break away from being labeled as “developing”, so these foreign funds will be needed to help those developing regions build their impact investing ecosystem.
In terms of the differences, the advantage for the Chinese market is its huge market size and various market segments. When a company needs to develop a business model, covering both poor and rich regions within China is enough, and there is no need to consider exports. In addition, China now has advanced infrastructures such as transportation systems and e-commerce logistics, so the enterprise business model is easily established. Because of these, I would be more optimistic that if we could stimulate the entrepreneurs’ sense of social responsibility, it is easy to turn the Chinese market into an active impact investing market. Moreover, from the perspective of wealth accumulation, China has enough capital to utilize. With good infrastructures and a large market, it is easy to test different impact business models in China.
However, there are some problems in China that are not conducive to develop the impact investing market. The first one is that there are not enough entrepreneurs who accept the ideology of impact investing. Because they think that it is better to pursue profits and companies do not need to bear many social responsibilities.
In addition, the common profit-seeking mentality will inhibit those innovative ideas that could have been utilized, making the market seem chaotic and reinforce the trend.
For instance, if the entrepreneurs in the country are purely profit-seeking, then there will be a group of investors who follow them under the purely profit-seeking ideology which will catch like wildfire resulting in the entire investment ecosystem being limited to profit-seekers.
In fact, I think many people have misnomers about impact investing. If we clearly define impact investing, this will lead people who get involved to clearly understand the concept and they will easily seize the original intention. I think this (educating investors) may be the biggest challenge facing China.
CASVI: Which Asian markets and investment sectors does DVF currently focus on, and what are the asset sizes?
Ong Pei Yeing: In terms of regions, I am currently focusing on China. And I would also look at some Southeast Asian markets, which are mainly based on the demand of Chinese enterprises. Because these companies will prioritize Southeast Asian countries if they expand out of China. For instance, some Chinese enterprises which plant bananas will give priority to Laos or Cambodia when they develop overseas markets. Therefore, the economic interactions between China and Southeast Asia will be increasingly frequent.
In the Chinese domestic market, I pay attention to the fundamental industries such as agriculture, which has been ignored for so long. From the bigger picture, agriculture is connected to the entire food industry and it can be broadened to an important topic such as food safety, including the safety of the supply chain, and food quality. All in all, it will be an enormous sector which we can improve upon .
Our funds firstly pay attention to SMEs, which we define as small to medium-sized projects valued at less than 300 million RMB. Our investment amount is about 30 to 40 million RMB. If we invest in a company with a valuation of 100 million RMB, our relative shareholding percentage will be around 1/3. So we can ask for a board seat and have a certain bargaining power to require standards for impact measurements and ESG standards.
CASVI: What do you think are the most important measurement criteria when building investment portfolios?
Ong Pei Yeing: From the assessment of business models of the current ongoing projects, we need to ensure that both social impact and financial returns exist. These two are not contradictory but inter-connected in the same direction. If business models cannot satisfy both requirements, we will not invest in these companies for the reason that some elements are not eligible.
Beyond that, we have additional criteria. First, companies must have good products. It is not saying that only products and services themselves are good, but there must be sufficient market demand for them. Second, the target audience who are influenced by the products must include poor people. Based on these principles, we look at two things, the industry, and the participation model. We will check whether the business models integrate low-income individuals and how these individuals are involved. For instance, in a business context, low-income people play three roles: suppliers, distributors, and consumers, which is good from the angle of the integration. Furthermore, we will pay special attention to whether the enterprises put a lot of thought into a stakeholder participation model, where not only the enterprises develop but also more entrepreneurs and people are encouraged.
When I look at an agricultural project that sells seedlings, I pay attention to how the company engages those who sell seedlings into its business model in addition to selling seedlings. If the business model teaches skills to those who sell seedlings and helps them cover some market access costs, consumers are also assisted in a sense when the products are sold in the market. Based on the experiences of a company that produced blueberries, the entrepreneurs found that purely selling the seedlings to farmers was not the optimal approach. It would be better to integrate the farmers into their business model, help the farmers improve the quality of their blueberries, and eliminate some entry barriers for them. In addition, the company could also develop some downstream products and diversify the customer relationships so that its business model could be improved. For example, the company originally selling seedlings developed a better relationship with customers cultivating seedlings, then it could easily get high-quality raw materials. Thus, when this company made downstream products, it easily turned into a food processing enterprise and diversified its income. During the process of developing a stakeholder participation model, the operation risks became smaller, the problem for growth was solved, and many opportunities occurred with low costs. From this perspective, I think that China especially needs more fund managers to encourage entrepreneurs to think about the social impact of their business, rather than purely focusing on temporary profits and the time to go public.
CASVI: What are the expected financial returns for LP at DVF?
Ong Pei Yeing: As we talk about the risk-adjusted market returns, the returns need to be consistent with the market. And we can gain 12-15% IRR from our chosen projects at present. The business models we have chosen are robust enough, and these entrepreneurs are more willing to bear social responsibilities.
CASVI: From an LP’s perspective, what are their expectations and attitudes in terms of this new investment model which can achieve both financial returns and social impacts?
Ong Pei Yeing: Most of our LPs are successful entrepreneurs or from Asian family offices. I think these LPs have a general test-water mentality so that they are not too determined to allocate their assets through impact investing. Compared with our LPs, some other overseas LPs, especially European ones, have higher and specific expectations on SDGs and sustainable impact.
However, I think it is hard to change such a situation in a short term. I think impact investing is currently a supply-side issue. There are not enough fund management companies and fund managers to prove that impact investing is effective. In addition, there is a lack of seasoned and professional impact investment fund managers, and most of the candidates are too young to be influential. From this perspective, it is difficult for potential LPs to have confidence in these GPs, and LPs will not invest much. As a result of LP’s not meeting a minimum investment threshold, the fund size does not reach scale, thereby resulting in the project not timely moving forward which in turn forms a vicious circle.
Those professional European LPs usually have clear requirements for GPs. Due to these requirements, those LPs who want to do impact investments will influence mature GPs to transform their business scope into impact investments. However, I think the outcome of such transformation is not ideal enough, which is similar to the logic of a large enterprise doing CSR. This transformation will instead inhibit the industry to develop well.
In a word, I think LPs would consider how they are comfortable to do impact investments. For instance, many family offices are used to cooperating with professional fund managers and are willing to allocate more funds to them. However, if professional fund managers are asked to try impact investments, the family offices may not be able to participate due to some investment restrictions set by themselves, which leads to the status quo we see at the moment.
CASVI: What are the strategies of risk management and prevention used by DVF?
Ong Pei Yeing: In terms of financial risks, as a US dollar fund, there is a direct exchange rate risk for us as our investments in China are denominated in RMB (including that our future exit would also be in China market). Another risk comes from the regulatory policies as China’s control of foreign exchange is not very certain. For instance, if we want to withdraw our funds, we need to complete currency conversion first and return it to LP. But the ideal timing for USD conversion also depends on the general level of exchange control in the macro context. Thus, even if we take action to hedge and eliminate exchange rate risks, the waiting time will still influence the final IRR, which is a very real problem.
In terms of controlling the risk of impact, first of all, the fund does not invest excessively in too many projects. We always optimize and focus on one portfolio, cultivate the entrepreneurs, and have constructive communication with them to make their business stronger.
Specifically, we think that the only thing investors can do to guarantee their impact goals, is active post-investment management, meaning that investors should participate in the decision-making process, tightly buckle the links between the firms’ business strategies and impacts, and focus on the execution.
This is the best way to ensure that the enterprises do not deviate from their original impact goal setting, which might be the most challenging but interesting part.
CASVI: What model does DVF adopt to measure and manage impact currently? Are invested enterprises comfortable with such impact measurement?
Ong Pei Yeing: We use the taxonomy from IRIS most in the impact management framework. It gives us a lot of inspiration, like a possible index matrix to analyze and manage an industry. Then based on the industry conditions, actual investment situation, and the results of collected information, we will match the indicators through taxonomy. For example, we can track three out of the six indicators suggested by IRIS each quarter. In this way, the additional cost of impact metrics management is not too high.
Impact measurement and management must be integrated into the entire investing process, but not just inserted in the middle process. Thus, one of our investment due diligence is impact diligence and this includes two purposes: one is to find the impact direction, and the other one is to confirm the indicators that can be used to measure and manage the enterprise’s impacts. At the very beginning, we match the indicators and models in IRIS to have a good idea of what we need to pay attention to. Thus, we can estimate the initial value of the relevant indicators and set a baseline during the due diligence in order to quarterly track the change curve after investment.
Our shareholding in enterprises is usually not too low. Therefore we have a certain bargaining power in the enterprises to fulfill our requirements for impact measurement and management. But most of the requirements have been negotiated well before our investments.
CASVI: Does the COVID-19 pandemic influence how you invest? And do you have some new insights?
Ong Pei Yeing: I have thought about this problem for several months. I think the pandemic influence the entire investment industry and not only the impact investment field. There are many nodes in investment management and operations. And some nodes are turned into actual barriers by the pandemic. As an investment manager, managing third-party funds requires a systematic investment process approved by LPs. Thus, I have been thinking if it is possible to redesign the entire investment process and take some abnormal situations into consideration. Moreover, I think the previous investment process is highly dependent on the fund managers. During the pandemic, such a process may cause a sudden halt or rely on some managers working remotely, which is not realistic. Thus we would better think of a disruptive innovative way to replace the current investing process. Finally, the previous fund management reporting model requires making a quarterly report, which is written in the next following quarter, which was delayed in its release. The pandemic has also spurred the need for digital investment management, which makes it necessary for managers to better ensure that the reporting and sharing of information are not interrupted, and even to use more real-time tools to complete communication.
CASVI: What do you think are the most interesting and worrying parts of doing impact investments in Asia?
Ong Pei Yeing: First, I think impact investing is feasible in China. China is an ideal practical ground because there is a large market, advanced infrastructures, and sufficient talented people to develop impact investing. I am very optimistic about China’s power in the global impact investing market.
In my opinion, doing impact investments requires communication skills, and thoroughly understand some development issues in the process of fund management. Only if investors have sufficient understanding, they can think about ways to solve the problems more effectively, which is the most interesting and exciting part in my opinion.
What I am worried about is that there are not enough fund managers who can really do impact investments. And because this group is too small and weak, their voices may not be heard, which are easily masked by other noises.
For example, most fund managers in China may not even be able to handle ESG, let alone impact. In addition, there have been lots of public opinions and loads of discussions about “good finance”. I am worried that someone suddenly jumps out and says what impact investing should be like, then deviating us from the original path.
CASVI: What do you want to know the most about impact investing in China?
Ong Pei Yeing: I think in China, we still have to rely on local LPs to promote impact investing. Therefore, the question I want to ask most is that in the Chinese market, which kind of LP group is the fastest and easiest to accept impact investment (or similar) products?
