Three Key Learnings on Effectively Deploying Catalytic Capital in Asia
In the AVPN Global Conference, 2023, held in Kuala Lumpur, Malaysia, from 21-23 June 2023, the session Finding the Best Practices in Catalytic Deployment in Asia explored particular challenges and practical solutions to overcome these challenges. Jenna Palumbo, Executive Director of Effective Philanthropy at Minderoo Foundation; Ritu Verma, co-founder and Managing Partner with Ankur Capital; and Wonyoung Kim, Crevisse Partners’ Executive Office director. Crevasse Partners participated in the discussion led by Stacy Xiao, Program Officer at C3 and New Venture Fund.
A few key ideas resonated with us:
Viewing Philanthropic Capital as Catalytic Funding
“Foundations could play a significant role in blending grantmaking and impact investing to create investment readiness and create an ecosystem. It’s a challenge, but it’s worthwhile .”> — Jenna Palumbo, Minderoo Foundation
Although grantmaking is a powerful tool due to its focus on impact and risk tolerance – it is unquestionably finite. Systems change that lasts for a long is only possible by engaging with the entire spectrum of capital. However, the transformation of money from philanthropy into catalytic financing is impeded by a dual-pocket mentality that views investment and philanthropic capital differently. Innovative charitable organizations such as Minderoo are breaking down this dichotomy. They recognize that a mix of investment and philanthropic money is crucial to assisting companies to invest more and building a more robust and durable pipeline.
Jenna Palumbo noted that pragmatically speaking, the move away from traditional grantmaking requires patience, internal promotions, education, and trust relationships to realize. Distinct, independent, and transparent approval procedures and different data about the grantee are necessary to ensure due diligence and efficiently use catalytic funds.
Jenna added that neither method is “better than one and that respect and understanding need to be developed between all the internal and external stakeholders. Potential philanthropists must be prepared to spend time researching their options, exploring different financing options, and finding other like-minded partners after they have selected the method that best meets the specific impact goals they have in mind. Additionally, finding the best grantees may assist in filling in the gaps and can assist resource providers and funders in navigating legal and administrative rules in their communities.
Collaboration with investors to achieve common goals
“The hybrid finance model combining private equity allows that private capital can invest in deals that are less market-ready. The key for the successful execution of an investment is in the value-up process for the investees. Investors must make sure that the blended finance will actually benefit the entire team, including the investment partners” Wonyoung Kim Crevisse Partners.
As Wounyoung Kim pointed out, investors who participate in new financing structures are typically required to take on other obligations, such as additional restrictions and different reporting standards, to appeal to diverse investors. This can make navigating these innovative finance structures more complex than single-investor financing. It is essential to know and apply the funding and construction of transactions in different blended finance archetypes within the framework of local laws. It is necessary to do this in a way consistent with the integrity of investment decisions and efficiently managing stakeholders’ interests.
This is especially important for impact investors seeking market-rate or higher returns to ensure that the blended financing structure doesn’t compromise the investment strategy but is in line with the investment strategy. Whatever the combined finance model employed and the efficiency of the financing method is ultimately dependent on the high-touch engagement with investors while ensuring capacity building is at the heart.
The panelists emphasized the importance of working alongside investees who, in many instances, are developing business models and practices. Minderoo and Crevasse actively interact with the investees in the form of board members, working together to build impact metrics and providing advice regarding business strategies. Crevasse is mainly proud of itself on its private equity model, where the company forms close relationships with its investees and engages in resource allocation, business development, and talent development. This is also viewed as a way to improve and expand the entrepreneurship ecosystem. If an investee’s company fails on its targets for impact, Crevisse holds intimate, on-site seminars in Korea to help examine and identify the causes.
Controlling externalities to minimize long-term impacts
“ A misalignment between your impact vision and what can be done realistically on the ground would be setting oneself up for trouble ” — Ritu Verma, Ankur Capital.
Ritu Verma from Ankur Capital noted that underserved sectors and geographical regions often pose significant challenges, as the core components of a robust market are not present. Risks are unregulated, and there is more room for error, which could impact financing and transactions over the long run. With limited knowledge of markets and insufficient commercial models, there will be bound to be externalities that one must control when making investments.
A participant asked how investors can be able to account for negative externalities as well as undesirable results. For example, farmers could be tempted to apply chemical pesticides to increase food production, but this could increase the risk of exposure to toxic substances that could harm our health. Similar to this, although investing in agricultural production can improve food security and combat hunger, the yields of crops are under threat from climate change.