Cover Story: Transforming lives through patient capital

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 29, 2020 - July 05, 2020.
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Corporate high-flyer Mason Tan had spent a good part of his life raising funds for social causes on behalf of the various conglomerates he had led. But the millions of dollars generated did little to meaningfully impact the communities these businesses had hoped to uplift or even deliver the environmental benefits intended.

What was missing were subtle intrinsic elements such as an understanding of economic and social inequality and the means of overcoming these challenges. This prompted Tan to seek ways to use capital differently, which was why he set up Garden Impact Investments (GII) Pte Ltd in 2013. The Singapore-based investment holding company focuses on commercially sustainable enterprises in Southeast Asia that aim to positively impact the local community.

“I reached a point about 10 years ago that made me question my purpose in life. I had been working in corporate finance for a very large conglomerate and was used to fundraising. But I kept asking myself whether my fundraising was making an impact on the lives of millionaires or billionaires?” says Tan, who is CEO of GII.

The answer came readily enough. It was not. These individuals were already wealthy; they just wanted to make more money.

Then came the collapse of Lehman Brothers in 2008 — the biggest corporate bankruptcy in history. The incident sent shock waves across the interconnected global financial markets, leading to one of the worst financial crises ever.

This experience changed Tan. He began questioning the purpose of wealth and whether the maximisation of returns should be the only consideration.


“I also realised how money, an inanimate thing, can destroy lives and families. It got me thinking hard, questioning everything I believed in,” says Tan.

“Was I serving the right boss, the right people? Was I making an impact on the right people? Why was I helping the rich get richer while the poor were getting poorer?”

On Tan’s daily commutes, he would observe the elderly trying to scrape a living by selling packs of tissues and a melange of knick-knacks. “I took the MRT to work often and I would pass them by every day. This is Singapore, a high-income nation. If that does not tug at your heartstrings, you are not human,” he says.

“The argument that ‘I am wealthy because I work hard and you are poor because you are lazy’ is not reasonable. You are what you are because you were given that opportunity.”

Tan also noticed the rising social inequality and tension between the rich and the poor in Southeast Asia. “Unfortunately, the widening disparity began to create gaps that allowed for political and religious extremism. These circumstances are a clear example of the connection between social problems and politics,” he says.

Tan knew that those with capital had to come together to address the issue of helping the economically disadvantaged in a more cohesive and coherent manner. “Otherwise, we would continue living in our bubble and pretending that the world around us is not changing. That was how I had a change of heart,” he recalls.

Tan drew inspiration from the work of Malaysian-born biotech entrepreneur Datuk Dr Kim Tan, who spearheaded social investment projects in impoverished provinces scattered throughout sub-Saharan African countries by coming up with self-sustaining enterprise solutions to address poverty. He approached Kim after attending several of the latter’s speaking engagements and proposed the idea of GII. Kim now serves as chairman of GII.

 

Cornerstone of development

GII started out by investing US$2 million in social enterprises across Southeast Asia, providing these entities with expansion capital. Today, its US$6 million (RM25.6 million) under management is invested in 11 social enterprises. The firm is also in the process of applying to be a licensed fund manager in Singapore.

GII’s investments are currently earmarked for three sectors — food and agriculture, services and inclusive communities. “The primary objective of these investments is to help the social enterprises scale up. We have made investments in Thailand, Malaysia, Singapore and Indonesia, and are on the lookout for projects in other neighbouring countries,” says Tan.

Unlike many impact investors, who are predominantly invested in Cambodia, Vietnam, the Philippines and Indonesia — which have comparatively mature impact investing ecosystems — GII also considers higher-income countries such as Singapore and Malaysia. That is because these countries are not without the intrinsic challenges that come with development and rapid growth such as urban poverty and social ills, says Tan.

“Our primary goal is not just to look at financial returns but also positive social impact returns. So, things like whether there has been a real income increase for the beneficiaries and whether the people are living in standard housing — rather than sleeping on the streets or in unsafe environments — are important measures for us,” he says. 

“We are also looking at social impact output, not just outcome. Output are measurements such as the mental wellness of the beneficiaries. For example, we constantly ask ourselves whether the children of the beneficiaries are being raised in a safe environment and not in violent households, or whether they have access to affordable healthcare.”

The firm chooses enterprises in the three sectors as these industries have some of the highest participation in the region and the businesses were already generating revenue when they were approached to be investee companies.

In Thailand, GII has invested in a company called Kestrel BioSciences Thailand Co Ltd, whose mission is to produce and supply affordable high-quality diagnostic test kits to improve the quality of life among the marginalised in developing countries. The company sells more than 6,000 test kits and exports more than 1,000 test kits to African nations every month.

“Now, we are helping the company ramp up the production of affordable Covid-19 test kits for export as well as domestic consumption,” says Tan.

GII has also invested in a Malaysian company, Affordable Abodes Sdn Bhd. It builds affordable, resilient and environmentally friendly homes for low-income families around the world using its proprietary technology — Kenafcrete — a biocomposite made of locally grown kenaf fibres. 

“A lot of people think social housing projects mean poor quality [houses]. In fact, the products that we have developed have passed the fire-resistant test, where the materials used are able to withstand temperatures of more than 1,000°C for two hours without anything happening to them,” says Tan.

“Affordable Abodes has completed about 11 projects in Malaysia. Although these are relatively small projects, it is a good start.”

In Singapore, GII is financing a contact centre called Agape Connecting People Pte Ltd, which seeks to empower the disadvantaged through employment. The company started out by providing employment to inmates at Changi Prison. Now, it also provides jobs to physically challenged persons, single parents and ex-offenders.




“Agape currently has about 180 agents — about 50 in the men’s cluster, 80 in the women’s cluster [in the prison] and the rest are working from their homes in the city,” says Tan.

“Recently, we were very privileged to be appointed by the Singapore government to run what we call the National Care Hotline, where we are able to connect callers with 500 volunteers — who are professionally trained psychiatrists and counsellors — to provide counselling. In the last two months, we have handled more than 18,000 calls.”

Agape founder Anil David started the company after serving eight years in prison, during which he had the opportunity to work for a call centre started inside the prison. The initial call centre was not a very successful initiative as it only employed about 20 inmates. 

When Tan came into the picture, he realised what was wrong and what it would take to make a call centre a more sustainable and effective touchpoint. “When Anil was released from prison in 2012, he decided to start a call centre business to help people like him reintegrate into society. We all know the struggle of having to fit in, and it is much more difficult for those who have paid their debt to society. 

“I came to know Anil when he was given the opportunity to start an Agape call centre inside the men’s prison. This was its third call centre. The first two, which only had 25 seats, failed. I analysed what happened to the two call centres and why they had failed. I realised that, based on our operating experience, one needed to have at least 50 seats to break even.

“To be profitable, you need to have scale. A lot of social enterprises fail not because the model is wrong, but because they do not have the money to scale. Now, we have 100 seats in the men’s cluster and 120 seats in the women’s cluster.”

More impressively, this revenue-generating initiative has made a dent in the number of prisoners falling back into a life of crime once they are released.

According to its internal data, Agape has impacted the lives of 550 ex-prisoners and fewer than five have been sent back to prison within two years of being released. Singapore’s overall recidivism or re-offending rate is 24% — relatively lower than in most countries as its Prison Service is committed to the rehabilitation and reintegration of released convicts into society.

“Because of these initiatives, the ex-convicts have the opportunity to work and learn new skills. They have jobs waiting for them upon release as they can be employed by our clients, or they have a skill that is ready to be engaged by other employers. They deserve dignity, a chance to earn income,” says Tan.

In Indonesia, GII has invested in a company called PT Harapan Interaksi Swadaya (better known as Greenhope). The green technology company makes two leading bio-compostable products — Oxium, an oxo-biodegradable additive, and Ecoplas, a cassava-based plastic.

“The company is already exporting about 40% of its products. These products help curb plastic pollution and create additional income for cassava farmers,” says Tan.

GII has stakes in several other social enterprises in Indonesia, including a honey bee initiative in East Java that provides employment to farmers, who would otherwise succumb to illegitimate borrowing from loan sharks. “Farmers are considered non-bankable because they have no regular income or assets that can be pledged as collateral, yet they still need to send their children to school and feed their families every day. So, they have no choice but to borrow from loan sharks when there is no harvest,” says Tan.

“But for every S$500 that they borrow from a loan shark, they need to pay S$50 in interest every month. That is just crazy and it turns them into modern-day slaves. So, we try to pay off their debts and help them to become part of our honey business.

“The entrepreneur managed to export a small quantity of the honey to Belgium at the end of last year before the whole Covid-19 shutdown. This demonstrated the quality of the honey and our aim is to increase the number of farmers [involved in the initiative], from 250 to about 2,000 farmers in five years.”

The key component of GII’s investments is job creation. That is because without equitable jobs, it is almost impossible to break the cycle of poverty, says Tan. 

Another reason for keeping its focus on Southeast Asia was the fact that it had limited investing experience when it started out. “When we started about eight years ago, we did not know how this would turn out. Impact investing was considered high risk as there was no track record at the time,” he says.

“So, we started small by focusing on projects that were closer to where we are based. As time went by, we built relationships with not just a network of investors but also mentors, suppliers and vendors who believe in the same mission, that is, helping to end poverty.

“Of course, there are a lot of poor people in the Indochina region and the Philippines as well but we have not built up a network there. We require a network of supporters, like-minded people who are willing to contribute their time, talent and treasures to make a permanent transformation in people’s lives.”

Having said that, GII is in talks with social entrepreneurs in Cambodia and the Philippines. One of the Cambodian companies processes nutritious moringa leaves harvested by local farmers, which are then exported to Europe. In the Philippines, the firm is looking at a business process outsourcing company that is 80% staffed by survivors of human trafficking and prostitution.

“We have found that among these survivors, about 50% have a high school qualification while another 25% have diplomas. This shows that prostitution is not a crime of poverty but of economic opportunities. In other words, even if they finish school, they will be led to prostitution if they cannot find a job, simply because they need money to survive,” says Tan.

“You do not solve problems just by sending children to school. You need to make sure there are jobs for them after they finish school. These former prostitutes and sex traffickers are now IT workers and experts. They know how to manage social media and help US-based companies digitise photos into videos and PowerPoint presentations.”

 

Character risk

Because of GII’s strong emphasis on impact, its due diligence can sometimes take 9 to 18 months before closing a deal, he says. “We need to make sure the social entrepreneurs are not rainbow-washing, where they claim to be social entrepreneurs but are using their social enterprises for their own benefit.

“We need to spend a minimum of one week on the ground to understand how they operate and whether they are genuinely trying to address a problem, or whether they are merely exploiting people. Our biggest risk is character risk. It is not about money.”

GII has had its fair share of failures, but none due to unscrupulous characters. Rather, the failure occurred because it took too long for the social enterprise to scale. “When I say it took too long, it was not like I expected it to be done in three months. But after two years of patiently waiting for the social entrepreneur to scale, it was time to cut our losses,” says Tan.

“That is where our team’s portfolio management skills come in. When you start to spend 80% of your time managing one of the 10 companies you have invested in, something is wrong. It means this social entrepreneur is missing the mark. Nevertheless, failure is part of the risk an investor takes.”

Traditionally, the immediate solution to alleviating poverty has been charity or philanthropy. But through impact investing, one has the opportunity to do good and do well, says Tan.

“People who are marginalised also want to do good, but they need opportunities. These people are poor not because they are lazy but because they lack opportunity. If you can give them the right opportunity by investing and believing in them, there is a good chance that their lives may change.

“For that to happen, we need to change our traditional risk-management mindset. I come from a corporate finance background, where it is always about using your head. To do social impact investing, you need to use both your head and your heart. That is why our typical fund life is usually 7 to 10 years because people need to be patient.”

Being patient is one of the core components of sustainability, he adds. “A lot of people think patient capital means three years, but that is not right. Patient capital means 7 to 10 years. This is where we need to educate people to change their mindset and shift to the values we want to teach them.”

Now that GII has a formidable track record, Tan hopes it will be recognised as a licensed fund manager, which will help it gain the trust of institutional investors globally and generate greater impact. According to him, the firm has provided its investors with a return of 8% to 9% on their investment. 

Tan acknowledges that the returns are much lower than those generated by venture capital firms but asserts that this is because GII is not searching for “unicorns” but “zebras”.  Zebra companies provide more options for their founders in underserved markets.

“Unicorns are about returns of 10, 20 or 30 times while zebras look at maybe 1.5 to 2.5 times. And we are not looking at it purely in terms of financial returns but community impact as well,” he says. 

“GII’s investors must be prepared to accept a lower financial return in order to have good social impact. You cannot have both high-impact returns and high financial returns all the time.

“But we have generated positive financial returns. So, we have the essential track record and have been part of a licensed fund manager. We should be able to open the door and talk to institutional investors.”

If there were any doubts about the efficacy of impact investing, the Covid-19 pandemic has certainly put things into perspective, says Tan. “The outbreak has exposed just how inequitable and inadequate our social safety net is. The pandemic has not destroyed the systems put in place, but merely reflects how broken our social fabric is. 

“The poor are not going to go away. The poor are not just problems for the government to deal with. Poverty is a problem for every section of society. It affects you and me.

“I would like to borrow a saying that I learnt  from the millennial generation — if you are not part of the solution, then you are part of the problem. I do not know how people can just sit on the fence and do nothing. So, by doing something, even taking a small step, and by changing our mindset, we can be part of the solution.”

For Tan specifically, it is about how he can use his gifts as an accountant and his background in corporate finance to make an impact on society. “It is not all about making money. It is about making an impact on people’s lives. That is the kind of legacy I hope to leave behind,” he says.