Articles 21 April 2021

How Family Offices Can Build an Impactful Portfolio

 

Impact is gradually gaining importance as an investment priority. In this article, we explore how family offices can calibrate their capital allocation strategy to make meaningful investments, and transform their wealth into conduits for change.

Profit with purpose

R&D firms innovating new solutions to address climate change. Fintech startups serving the underbanked and unbanked. Innovative brands creating alternative protein products. These are just a few examples of the proliferating number of technology-led, for-profit companies whose very existence is driven by audacious goals to solve some of the world’s biggest, most pressing problems. This has garnered a great deal of attention from investors, and the result is a brighter spotlight on investment opportunities in environmental, social and corporate governance (ESG) deals. Among the forerunners in these opportunities are Impossible Foods, Beyond Meat, and Shiok Meats, who have proven that impact-driven missions and financial returns are no longer mutually exclusive.

The next generation in the driver’s seat

We can only expect companies of this nature to be mainstays in the coming years. Studies conducted on Millennial and Gen Z consumers demonstrate the importance they place on supporting brands whose values they align with. According to the Deloitte Global Millennial Survey 2020, 42% of respondents have “begun or deepened” their relationships with businesses they believe have positive impacts in society or the environment, while 37% have abandoned or retreated from companies they didn’t believe were ethical. As investors, their philosophies will not be much different.

With the more mature spectrum of affluent Millennials approaching middle age — primed and prepared to take over the reins of their family businesses and offices — comes a fresh approach to investing. A study conducted by Campden Wealth revealed that 47% of family offices are already involved in impact and ESG investments. No doubt, the next generation of family office leaders will be actively engaged in impact investing as they work to transform their assets into conduits for change. Fuelled by foresight, the World Economic Forum has created a framework for impact investing as a way for investors to gain clarity on how to navigate this nascent landscape. With this new approach, financial returns will not be the only measurable key outcome; tangible social or environmental impact of investments will matter too.

The way forward

Global challenges like climate change, food security, and social inequality have been further magnified by the COVID-19 pandemic, revealing glaring gaps in our socioeconomic and environmental systems and uncovering opportunities in solutions development. In the first four months of 2020, investors poured a record USD12.2 billion into ESG funds, which can be partially attributed to the exceptional resilience these funds bear in the face of disruption. The pandemic has reiterated the importance of ESG investments as a viable way to address the multitude of issues we collectively face today.

"The Covid-19 pandemic shares similarities with a fully-fledged climate or biodiversity crisis: it is systemic, with knock-on effects around the world. It also illustrates the 'tragedy of the commons' – where individual actions can run counter to the common good if they are not coordinated globally to preserve a shared resource – be it a virus-free environment, a diverse biosphere, or a life-friendly climate."
— Hervé Duteil, BNP Paribas' Chief Sustainability Officer. (Source)

Impact investing in Southeast Asia

We are well in the golden age of growth in Southeast Asia — driven by rapid population growth, socio-economic development, an increasingly powerful consumer base and growing interconnectedness with the global economy. The cocktail of factors has resulted in a continued flow of direct investments into the region at an accelerated rate. As a result, a new class of entrepreneurs has emerged; one  focused on building technology-driven solutions and driving impact in their communities, across a myriad of sectors. Synchronously, investors have evolved to mirror this, with more capital being deployed into social enterprises and other startups that build future-proof infrastructures.

At Fundnel, family office activity reflects the regional sentiment in impact investing. In 2020, ESG deals made up 23% of all funded deals on our platform. Sectors of particular interest include HealthTech and financial inclusion. Our AgriFoodTech deals, including Eden Farm and Lever VC, attracted significant attention, when concerns on food security in Asia came to the forefront as a result of the pandemic.

As we look towards the future of family office investing, impact sits clearly within our purview. If you’re a family office just dipping your toes into this area, here are some ways you can deploy your capital purposefully.

  1. Adopt the role of a strategic investor
    Family offices with sector expertise can adopt a strategic role to guide their portfolio companies, particularly if these companies are in their early stages. At the same time, family offices can gain greater control in the outcomes of their investments — as an operational partner, they will have the ability to open new doors for deal flow traditionally exclusive to PE/VC firms.
  2. Provide seed financing in underserved markets
    Early-stage funding is crucial for ESG companies, especially in Southeast Asia where venture capital and private equity are typically hard to reach. Family offices can take on the role of being a lead investor in companies they believe in and make a far-reaching impact in emerging markets.
  3. Channel capital to build infrastructure
    There are growing opportunities to invest in innovative vehicles, particularly in emerging Southeast Asian economies. These may come in the form of social impact bonds or development impact bonds. Family offices can take the lead in this area, leveraging their investments to lower investment risk, while paving the way for other investors as well.
  4. Encourage others to participate
    Family offices can tap on their network and guide other family offices to lean into the impact area. Additionally, this may open a new avenue for family offices to meet the minimum investment requirement of many deals, and directly make a multiplied impact in more ways than one.

To learn more about impact investing and how you can calibrate your capital allocation strategy to make meaningful investments, watch the recap of our recent Family Office roundtable, featuring insights from leaders from Altara Ventures, Azimut Investment Management, and EY Singapore.

This article is intended for general informational purposes only. It is not, and should not be construed as, any form of financial, investment, tax, or other professional advice provided by Fundnel Pte. Ltd. ("Fundnel") to any person who is directed to or otherwise accesses this article, including yourself. You are responsible for seeking professional advice before making any investment decision. Fundnel is not responsible for any loss you may sustain in relying on this article.