SFI LEADS ASIAN SUSTAINABLE INVESTOR GROUP IN LEAPFROG FUND DUE DILIGENCE
Sustainable Finance Initiative (SFi) played an instrumental role in bringing the first Asian group of private investors to LeapFrog Emerging Consumer Fund III. Coordinating the due diligence process in collaboration with the investor group raised the awareness, skills and confidence of all involved and marked an important step forward for SFi.
The Asian private investors in the group were ready to take action, but they wanted a little extra support and guidance as they conducted their first in-depth due diligence focused on the Environmental, Social and Governance (ESG) aspects of a potential investment. For some, the LeapFrog Emerging Consumer Fund III would be their first sustainable finance allocation, while others already had experience.
SFi was tasked with leading the process and shared industry best practices in impact due diligence. Each investor evaluated the opportunity investment independently and was responsible for their final investment decision. The resulting investment capped off a successful first year of operations for the Hong Kong-based private investor community platform. Working as a group made all investors feel more informed and prepared to tackle their next sustainable investment.
“Everyone had already been engaging with SFi for some time, so they had the tools needed to think about impact and did not come into this process cold,” said Katy Yung, managing director of SFi. “These were people who were ready to activate their portfolios and translate all the education they had received into action.”
The group of Asian sustainable investors included RS Group, Affinity Impact, Blue Pte Ltd, OIC Capital, and Peterson Group. They made a collective allocation to the USD700 million LeapFrog Emerging Consumer Fund III, with each investor investing separately through their own respective entities. The fund targets 70 million low-income emerging consumers with healthcare and financial tools in Africa, Asia and SE Asia.
“The investors chose LeapFrog for their strong track record, mission alignment and delivery of impact and returns in a coherent, integrated manner. Also, importantly, our investors were attracted by LeapFrog’s Asian exposure,” Katy said.
Most of the investors in the group represented next-generation asset owners but they were all driven by different investment motivations, from a desire to align their investments with their values to a need to learn more about sustainable finance through action or a mission to find better and more efficient ways to help people and improve the world. Their varied backgrounds, from real estate, hospitality and education to manufacturing, brought an interesting mix of perspectives to the discussion.
Comprehensive Due Diligence
The impact due diligence process began with a light screening to ensure that LeapFrog was worth further investigation. The group held a series of conference calls with the managers and examined the impact of the fund, making sure that it was robust enough for their requirements.
“People prefer to invest with other like-minded people they know and trust. When you have a group of investors you need one investor who really understands the impact space, and the others are able to learn from this experience,” said Jerry Lam, senior vice president of the Peterson Group.
The next round of due diligence included examining the fund’s investment thesis, their team, strategy and track record, financial, ESG and impact performance, the portfolio companies the fund invests in, their pipeline of investments and the competitive landscape. SFi coordinated agreement on the scope of the groups due diligence and organised an on-site meeting at LeapFrog’s offices in Singapore as well as reference checks with existing limited partners (LPs) in the fund to gain better insight and validate the strengths and areas of risk in their strategy.
“SFi led a rigorous due diligence on LeapFrog and the fund’s financial and impact track record and it was a very collaborative process among the SFi member organisations,” said Nick Moon, a LeapFrog partner and head of its investor relations.
SFi collated the due diligence into a comprehensive report. The investors met and discussed the report, and each investor came to their own decisions in terms of their allocation intentions. The due diligence report was also used by the investors to facilitate their own internal discussions with their investment committees and family boards.
The report is a good showcase of the collaborative process and it can be used to educate future investors.
“Being a small family office-based impact investor, having the access to SFi’s due diligence reports enabled us to accelerate our process and provided us with the confidence to proceed with the investment,” said Juanita Fu, chief executive officer of Blue Pte Limited.
“I would not have found this investment or been able to capitalise on the opportunity if it had been just me, working alone,” said Jack Yeung, the founder of OIC Capital. “SFi led a very thorough due diligence process.”
The group approach was also reassuring to new investors. Sally Tsai and Wayne Chang’s investment company Affinity Impact had considered other Southeast Asia-focused private equity impact funds, but their lack of due diligence experience made it harder to recommend a fund to their family office.
“This process significantly augmented our due-diligence knowledge and experience,” Sally said. “We learned about the types of questions to ask, the way to probe, how to process the information and follow-up, and how to ultimately present our findings. It would have taken us years of experience to achieve the same level of due diligence on our own.”
Sally’s family office gained confidence from the group’s collective expertise and decided to allocate assets to LeapFrog. They were impressed at the due diligence carried out on LeapFrog’s team, including their motivations and their commitment to the industry.
“Katy asked about the junior team’s promotion opportunities and whether they were being treated fairly. At first, this seemed odd to us because the fund’s big decisions were obviously made by the senior staff only. But gradually, we began to see that the junior staff’s treatment reflected LeapFrog’s values and its internal processes. More importantly, the junior staff are the people who will lead the fund in the future,” Sally said.
Jerry said that few Asian family offices have the resources to conduct a similar level of due diligence as was possible with this group. However, he said Peterson is now better equipped for future investments, having gained additional experience and insights through the shared process.
“I was impressed with how SFi led us on a really deep dive into the fund prospectus and analysed the actual impact of the investment, how the companies operate, right down to how low income families would benefit and other such details,” Jerry said.
Learn, Connect, Invest
While SFi, and its sponsor RS Group, have shared their sustainable finance best practices with numerous private investors in recent years, this was the first time that SFi led a group of investors through the due diligence process for a live deal.
“Coordinating the impact due diligence process for this group of private investors is great way to wrap up the first year of SFi’s work,” said Leonie Kelly, director of SFi. “We believe there is an increasing need for impact partners of this nature to support investor with both impact due diligence but impact measurement.”
SFi’s three programme pillars — Learn, Connect, Invest — worked in close synergy to bring this first allocation to fruition. In its first year of operation SFi has served a growing group of investors, mainly through market news analysis and investor profiles, as well as peer-to-peer events where investors discussed lessons learned from their sustainable finance investment experiences.
“As more product floods into the market we need to have clear standards for what constitutes an impact investment, and SFi plays a role in educating and upholding those standards,” said Katy.
“The support offered to investors under the Learn and Connect pillars ultimately prepared them to take action through the Invest pillar. Taking this step and investing in a fund as prominent as LeapFrog’s is evidence that the Asian sustainable investing community is maturing,” said Leonie.
“A commitment from SFi’s collective group signals to the market that there are Asian investors interested in institutional quality impact investing,” Nick said. “SFi is well positioned to play a catalytic role in pioneering this investment strategy in the region.”
The entire due diligence and allocation process for the LeapFrog fund took about three and a half months, while Katy estimated that due diligence of a listed equity or fixed income fund would take about one and a half months. SFi is also contemplating an annual review process of the fund as a way to actively monitor the investment from a financial and impact perspective.
“SFi will continue to bring together more impact investors who wish to learn, connect and invest for positive impact, and we hope to continue this work in the year ahead” said Leonie.