[Full transcript]

 

Stephanie: We've got Charlie Luchangco, the founder and principal of Arete Capital here. Welcome, Charlie.

 

Charlie: Thank you.

 

Stephanie: Arete Capital is a multi-family office and boutique financial advisory firm here based in Hong Kong and one of our founding sponsors for the SFI investor circle. Thank you very much for joining us here today. Before we go on, can you tell us a bit about your background, how you got to Hong Kong, and how you got to founding Arete Capital, please?

 

Charlie: Sure, so starting, I was born in the Philippines and we came to Hong Kong very often as tourists actually. Based on that, we always had a love of Hong Kong in our family. My family is primarily in the finance side, actually, both branches of them. There are a few exceptions, there's one engineer and there's one doctor, but they're mostly finance people. There's a love for Hong Kong. I studied finance in university. After university in the US, I wanted to come back to Asia, so it just felt like a natural fit. The other alternative was to do technology in California, which some of my friends did, which maybe I should have done that but I came out here.

 

Stephanie: Well, it's lovely to have you here.

 

Charlie: Yes. I've been here 25 years in Hong Kong working. So that's the background, how I've gotten here. Most of that initial phase, 17, 18 years was with the large banks or the larger shops, and it was different corporate roles in a very commercial activity, I would say. I think one of the changes though, even within the commercial roles was JP Morgan. JP Morgan had a very active, philanthropic, holistic, deeper thinking initiative than other banks.

 

I think that started with one of the old staff of JP Morgan. They were bridge builders for the Russian czars and they left during the 1917 revolution and came to America, but they had their own initiatives and one of their descendants joined JP Morgan. I learned a lot about it in JP Morgan, actually, I would say. That's still within the commercial context. Then I left the large shops at the end of 2011 and struck off on my own independently, working with clients independently, and so that's just a bit of the background.

 

Stephanie: Wow. You mentioned philanthropy and commercial here, so how do you personally view philanthropy and impact in sustainable investing within that spectrum, or is it different pockets too?

 

Charlie: At first, it was definitely different pockets. There's no question. In fact, I think one of the recipes for disaster, I think it was 2009, 2010 we were looking at, is combining a quasi-philanthropic or impact investment with a commercial initiative and not knowing exactly where the mission sat.

 

It just tended to confuse everybody, and those were probably some of the earlier days of what we see as sustainable finance and impact investing.

It confused a lot of people, so not having a very clear mission, either way back then, that's like 10 plus years ago, tended to confuse. Because of that, I treated them as separate in the early days. The philanthropic we, my wife and I, got involved in was welfare of animals because that's what we really care about at the time. We got very involved in that and that was nonprofit. Not-for-profit, dig into your own pocket pieces.

 

We joined an initiative and where we tried to make it sustainable was that rather than the organization was and is always volunteer-based, but to try to get the legal structure in place, the mission very clear, the funding in place, I worked on that quite a bit, my wife, even more. Then where we got that to was we've homed, I think, a good 4,000 animals in Hong Kong, dogs and cats over a long period of time though.

 

I think it was 2015 where we got the FT's, Financial Times, philanthropy partner of the year in Hong Kong on that. That was a nice one for the group. That was the first more official foray that we did, but having grown up in the Philippines, which is, it's a third world country and there's a huge disparity of wealth, even from a young age, we see this all the time. We grew up middle class or lower middle class, I would say, and the family was all right, and you just got a little bit more comfortable over the years as my father and my uncle worked very hard. We saw all parts of that society, so that was always ingrained in us, disparities.

 

Stephanie: At this point, having founded this incredible philanthropic project and doing what you do now, advising multiple clients as well, where would you say you are in terms of your sustainable and impact journey?

 

Charlie: I think what we're happy about is that we've been able to take it places. The multi-family office tends to have a very commercial angle to it, but within that overall piece, what we've been able to do is get different constituents who engage us on a commercial basis involved in other things. For example, one client, and commercial basis is a client, he's a low-cost builder in the Philippines. Every time he builds a low-cost subdivision out of his own pocket, he throws up a school for that subdivision.

 

The cost about 30,000 US, which buys you a lot in the Philippines. He says, "I could put up something ramshackle, but let me do something very nice that will stand the test of time for this community." He does that out of his own pocket. We've offered to partner up with him for the laptop. Collecting all laptops here from Hong Kong as a start and sending them to good places in the Philippines.

That's a way where we've engaged our commercial clients to do something, more basically. Number one, I think if they weren't thinking about it, many are very happy to do it, but many have their own initiatives of their own and they just haven't engaged us on that level until we brought it up. It's kind of a win-win, it's good relationship builder, and it benefits the society as a whole, so happy to do it.

 

Stephanie: It's almost like you're an action-based advocate where you're making it easy for people to do a little bit here and there and then roll it up, would you say?

 

Charlie: Yes, I think that's a fair statement. Then other people have made it easy for us to get involved in different projects so that's helped us in our journey as well. We were a co-founder on a sustainable farm in Hong Kong. We got involved in that because we started buying veggies from them for my daughter who was turning one and I'm paranoid of the food chain, very paranoid of the food chain. We went there to visit Alan, visit his facility, got to know him.

 

I was introduced by a friend. That friend is in finance as well, but interested in permaculture, and we posed an idea to him. What if we expand this larger? We need a little bit more professionalization, we need to raise some money. His comment was, "I'm already thinking about it.

 

Some big banks have been in touch with me about that, but they're just financial players and I won't entertain those."

 

The friend who introduced us was very involved in permaculture. The farmer, as we call them, was open to the idea. We've taken that, we got built in about four or five years ago. I've learned a lot in that process and we've taken that further since, raised a couple of rounds on that and building up. We tried to make it easy for some people, but some people made it easy for us, I would say, to get involved.

 

Stephanie: Yes. In terms of the causes or key missions that you identify with, you mentioned earlier on, you're passionate about animal welfare, and then you got into sustainable farming. At this point, are there causes or SDGs that you particularly aligned with?

 

Charlie: Yes. We still do focus somewhat on animal welfare on the environment, but especially after having a child and realizing that it's almost embarrassing that you have a child who has 25 dresses and 15 pairs of shoes, when you can see very clearly that other people have not one pair of shoes. There's something wrong with that, so because of that, we got more involved in children's missions. Pick your country, there's no lack of things to get involved in. We've just started the easiest place for me to start, which is in the Philippines. We got involved with a few centers for street children, daycare centers, not necessarily orphanages, but daycare centers for children who are not well cared for and things like that.

 

Stephanie: As someone who's had experience both in terms of pure philanthropy and also investing with impact, how do you look at those two in your mind and across your portfolio?

 

Charlie: In answer to your earlier question where, how we saw things before, where I was answering how I saw things before, whereas we thought they had to be very separate before, just based on a personal experience in the way market proceeded and how it's changed until now, I think it's a really changed a lot now, where there's still a spectrum of how much do you care about a financial return versus how much do you care about the impact? Is it 50-50 or is it weighted to each side.

 

I still find in Asia, it tends to be a little weighted to one side, but then the desire to have the multiplier effect or good karma coming out of your investment activities, there's more and more and that resonates more strongly with clients, even on the commercial side. If we can show an investment that will provide a financial return but not suffering the commercial basis, it has a very nice impact. We're getting greater acceptance from families in the region that, "Yes, let's look at that, it might be interesting."

 

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Stephanie: Alright, I think that brings us quite neatly into your work at Arete Capital. Can you tell us a bit more about the families behind Arete and the investment scope of the group?

 

Charlie: Sure. Most of the families that are clients in close relationships, we've known for a very long time. It was just a natural. We were investing some of our own family money, but the first single non-family client was in 2012 in January, when we began. I wanted to take three months off because I had 17 years with no real break. One fellow said, "If you're going to start, I'll be your first client, but you have to start now." Okay, no choice. You can't say no, right? We started. By and large, these are people we known a very long time. There are a few exceptions, but that's most of the case.

 

It really began as a public market commercial activity. That's what it was, discretionary management of portfolios as well as other needs that the client may have, legal structuring, and things like that, stuff we've done for a long time. Then we started to notice way back in '05, that what families in the region were looking for was changing already. They weren't interested to part monies as much in liquid public securities and just leave it at that. Some were moving toward impact. Others are staying on the commercial side, but wanting direct access to deals, whether it's strategic or just on a profit motive basis.

 

That became louder and louder and louder, so that starting in about 2014 or 2015, we started to-- That wasn't in our DNA. We started to learn more and shift and delve into those areas. If people would accuse us of something, it's being slow, right? We learn very slowly, and we didn't even put any investment money to work for about a year. We spoke to people in the industry, learned a little bit more, then we started to make investments and learn and we've had some good experiences and we've had some tuition where – you know – we've learned on that one. We've had a little bit of both on that.

 

What we found is that either the direct deals we've started to do or the direct deals with Impact have been an interesting way to stay relevant because at the end of the day, it's staying relevant. One thing I might say is that if the constituents and clients said, "No, no, just keep doing liquid public market securities and we're totally happy," I think we will still be doing some things, but then we are also listening to what customers were telling us, and clients and friends were telling us.

We set some steps in that area, but what's been interesting is we've been able to engage a lot of people who we know, but felt we were not relevant before, all of a sudden, we became relevant, and said, "Wow, this is really interesting. Let me pull in a friend. Let me introduce you to that guy."

 

Which is very different from when you're doing pure commercial activity. It's nice to be relevant, and it's fun, and you learn things in that process. One of the biggest benefits we have is, as some constituents were introducing other people, learning more about them and their thought processes, that helped us.

 

Stephanie: How would you compare the different families with whom you're engaging with regards to sustainable impact investing? Is it typically led by the stereotype of impact investments is next gen millennial, who wants to eliminate plastic straws. Is there a typical case or are there common causes?

 

Charlie: Yes. Plastic straws issue, we'll come back to that point. That's funny you mentioned it. It's not so much the millennials that we've seen because those people, I'm speaking more of Southeast Asia, I've seen more of the second generation and they themselves have been very, very involved in these impact investments. One of our clients who's a really relative of ours has a very large farm in the Philippines. Farming in the Philippines is almost like in Southeast Asia or in the emerging markets, it's like a feudal practice, right? You pay a pittance to the workers, and you have output and you sell that and export that.

 

They've been extremely proactive and they've gotten accolades from the German government, the Singapore government. They have a large, like a thousand hectare piece of land that they're doing super interesting things with. The first thing that we did together that was an activity was when they heard about our sustainable farm here, they came up to see it, they loved it. They thought there was some interesting collaborations as well as transfer of technology back to the Philippines, and they became investors.

 

I think that the generation there that made those decisions, they're in their 50s. I wouldn't say the millennials at all. It could very well be, as you say, but it just hasn't been our experience. We see different parts of the generations getting involved in this.

Stephanie: Do you think that the recent market volatility and COVID as a broader social phenomenon has affected the appetite or the urgency of impact investing for your group?

 

Charlie: I think, on the appetite, there's definitely some impact depending on who you speak to. I think the reasons for that are there are some concerns about the economy and geopolitics and liquidity. Maybe that's true, but there are also a lot of opportunities that have been opened up.

 

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Stephanie: To what extent do you think that the recent market volatility and the broader social phenomenon caused by COVID has affected the appetite of your investor group with regards to impact?

 

Charlie: I think that the recent volatility means that everyone is busy and busy for different reasons. Some, it's their operating company and supply chain, as you mentioned, is in a mess. It could be that liquidity is drying up, there's lack of clarity on the economy and people are worried, and therefore, they're holding back. There's a little bit of that also. I think there's also a lot of opportunities that have opened up. There are different pricings that have moved, different groups who looked at collaborations that they didn't have before. They look to redomicile businesses. There are a lot of opportunities as well, and that keeps people busy. That's for those who are investors and business operators, et cetera.

 

I'd also say that one Silicon Valley tech entrepreneur was mentioning, COVID is the great equalizer. Everyone is equal. They have an equal chance of getting sick. I don't think that's true at all because some of us have the luxury of staying home with the kids and watching Netflix and make sure the family's safe, whereas others have to go to a dangerous job in terms of contracting the virus under unsafe conditions, just to put food on the table. It's not an equalizer at all. It's very different across your circumstances.

 

What that means also is going forward, all the more I think we need to look at the problems that society, not only they're not getting solved, but this puts a focus on them. How do we feed the populations? How do we keep them healthy? All these questions that are asked. Environmentally, one thing I read the other day, was that despite the lack of billions of pieces of output of carbon in the spewing out because of the economic shutdowns, that has had no impact on the sea temperatures. They continue on their trend.

 

If anything, this is a wake-up call for everyone, but it's not changing anything. This is a small opportunity to take advantage of, to focus even more on what we as a planet need to do. I think that that's important. You mentioned earlier the straws issue, and as I said, we'll come back to that. The sustainable farm that we have, the family that was behind that started business 31 years ago and basically that was sending billions of pieces of plastic manufactures in China sending it off to Europe. Straws, forks, spoons, disposable cutlery.

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I think when they started they were young and everyone is hungry, they needed to make some money, but they themselves came to the realization that it's just a pretty wasteful thing that we're doing and they themselves shuttered the business on their own volition even though they had future business source and they maintained business relationships. There is someone who went to school in California. He studied business, but he learned about organic farming there, and he came back to Hong Kong to start this.

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It's a double whammy in the sense that they shuttered something that was not helpful at all rather bad and they started something which hopefully will be quite supportive and helpful.

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Stephanie: Yes. No, that’s an incredible story. Thank you so much for sharing that with us. Using this investment as an example, what are the hopes and goals from US and investor the next couple of years, and how's this representative of your approach to impact overall?

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Charlie: Sure. We would like to involve our constituents in our relationships at least at some level in the projects that we feel are important. It could be in a much more major role. It could be serving a subordinate advisor. It could be raising funds and funding. It could be just enabling in the local countries where they are, but at least in some level to do that. We've had bright points of success along the way and we think there's much more to be done there. It keeps us relevant.

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Stephanie: The final area that I want to focus on is challenges and outlook. As an impact investor based in Asia, what do you think are some challenges that you've experienced personally?

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Charlie: One of the challenges is that in many of our relationships, the historical context of that was a commercial discussion. There was some service, some product that led to a commercial output and that is the expectation based on the relationship usually when we were having meetings. I guess what we try to do is weave into that conversation that relationships are complex and multifaceted, there are different things that we can do within the conversation.

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Within every meeting, not a phone call so much, but every sit-down meeting, there is the opportunity to start to delve and to see what that counterparty does on their own. Many have their own initiatives, would they be interested in some of the initiatives that we have in some form or fashion? To carve out 10 to 15 minutes or more within the context of a meeting or a lunch, that's not very hard. Sometimes it yields nothing, but then there are other times where-- We had one client where they invested in a tech company. They are in an IT company in the Philippines.

He said, "We have tons of computers and we have to recycle them pretty quickly because we're an IT company. We need new computers. We usually sell them, but we'll give you X dozen. Wow, that was something where we just weave that in the conversation. I didn’t know there were majority investors in that particular company, but he revealed that. To weave that into a discussion is not very hard and then it leads to bigger things.

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Stephanie: I think based on our conversation, the way you've-- From deal sourcing to distributing or passing on these potential investment opportunities is very much organic based on the relationship. Would you say that this is typical of your understanding of the impact Asian space? Do you think this is related to the fact that lack of relevant part of flow and dual flow consistency has been sighted as one of our top bottom ranks within our space? If so, what do you think will be a solution for it?

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Charlie: I think the professionalization that has been brought into this space these last few years, you're seeing some really serious mission-driven focused operators in the space. I think that comes a long way to have those constituents who have not done something yet in the space say, "Okay. I can see that if I'm a supporter here, there's a very clear mission. There's very clear accountability and criteria and my money is not going to be wasted to waste." I think it's been a little bit of fear, I would say, on investor's minds in my experience, but 10 years ago or 20 years ago, it wasn’t no way near what it's like today. I think that's a key to attracting more attention to the space.

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Stephanie: Yes. Talking of professionalization, obviously, quite close to heart is the establishment of best practice standards, but also creating a more favorable policy and regulatory environment. From your perspective, what are the key developments that you wish to see in this space?

Charlie: I think governments have done some work on this, but I think that private companies just by the sheer size and depth of the reach have to lead the way. In many cases, they have. So - the Mekong Club which you hosted about a year ago, I've met a couple times with Joe, and it was interesting because the following night, we had a conversation, someone introduced to us in the US and it was just purely a commercial basis. We were involved in the same sector. We have companies in the same sector that we could be in collaborate, and we found out there was nothing we could do there.

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We were in just different parts of that sector, but they were in manufacturing, and supply chain slavery was the number one thing on his mind. We had a great conversation, but 95% of the conversation moved from that field to this. I introduced them and then they went on to do things I think, but we continued to engage with that group based on a common shared value. I think he was coming from it from the corporate angle and he also felt that the corporates have to lead. That was the family behind Cole Haan shoes, very familiar with supply chains having moved the supply chain to China.

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I think the corporates have to be at the forefront of it, drive the change, and the governments will usually agree or catch up or whatever they may do in the space within which country they are.

Stephanie: Yes. Alright. I think as we wrap this up, can I ask you for some final words of encouragement to investors who are new to the space or interested in deepening their practice in the space?

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Charlie: Yes. We're just learning piece by piece, but I guess that the things we've learned, as I mentioned earlier, that we started very slowly. We started looking at it, trying to learn but not doing much. The best way to learn is dip a toe, start by doing something. It doesn’t matter how modest, how big, how small, but just by doing something and getting involved.

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I think what we found is that the skill sets on the private side have translated very, very well to the impact investment side, whereas, you want to see your credible management team, you want to see accountability, you want to see execution, we still need all these things there. The lenses that we have already are useful for the space, but the most important is to dip a toe, otherwise, it's all theoretical.

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Stephanie: Are there sources of support or reference that you would recommend at this point?

Charlie: You guys are one of the biggest sources of reference that we have right now, SFI. In others, different ones, but of late, yourselves, we're members of the AVPN and we've learned some things through them. We met different people in GIIN and toniic et cetera, but, yes, I think that these are the ones that we've relied on, at least in our journey now.

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Stephanie: Alright. Well, thank you so much for sharing everything with us today and-

Charlie: Thanks for having me.

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Stephanie: -all the best to you as you continue on your impact investing journey.

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Charlie: Thank you. For any of you who want to adopt a dog or a cat, we are long. We have animals that are nicely cleaned up and they're very gentle. Please look us up, hkpaws.org.

Stephanie: Alright. Thank you very much. Bye-bye.