Asian VP investments on track to perform(2)

Asia's venture philanthropy investments have not yet been exited, but industry sources believe they are set to generate satisfactory returns.

Although venture philanthropy as a business model only made its debut in Asian private equity three years ago, IRR is already set to equal those of venture philanthropy in the West, according to industry sources working in venture philanthropy.

One partner of a global venture philanthropy firm says that his fund’s global IRR, which has at least four Asian investments, is about 15 percent. The IRR of the Asian investments, of course, is unrealised, but in terms of profitability and scale, he believes they are already set to generate about the same returns as the fund’s Western investments.

There are differences across the Asia-Pacific region, he added. For example, China and Southeast Asia are showing slightly lower returns, while India has both more opportunities and higher returns, because the venture philanthropy market there is slightly more mature.

One of Asian venture philanthropy’s biggest barriers is a lack of track record, according to Ashish Dhawan, ex-senior managing partner of ChrysCapital and current chief executive of non-profit Central Square Foundation, who recently left his private equity firm to devote all his time to India’s education sector.

For example, Dhawan spends much of his time with third-party donors, who have only recently begun to see venture philanthropy as a sensible investment. These donors have to meet with the entrepreneurs and see the quality of their business proposals to be convinced.

“They’re only just beginning to see proof of concept – you have to show them something tangible,” Dhawan says.

Given that most venture philanthropy investments were made in 2010 or after, exits can’t be expected for some time. LGT Venture Philanthropy, for instance, expects to exit its Asian investments over the next two to five years, according to Wolfgang Hafenmayer, managing partner at the firm.

LGT has 8 investments across Asia, including Driptech in both India and China, which works to provide poor farmers with more affordable irrigation and help them save water.

However, Hafenmayer suggests that most private equity professionals would not get involved in venture philanthropy for the financial returns. The pitch is instead that rather than “dishing out money” to a social cause, they can use their private equity skills to scale their impact and still get small returns.

The scale of venture philanthropy in Asia can be staggering, Hafenmayer insists. For example, just introducing electricity to a village can help thousands of people start up their own businesses and go from struggling on $150 a year to being financially independent – simply because they can make small products in the evening. In Asia alone, Hafenmayer estimates that there are millions who live without electricity.

He says the magnitude of the impact private equity can have is spectacular. “These companies depend on small margins, but have a vast number of people they can reach.”