Insight: Why Indonesia is a Perfect Ground for High-Return Impact Investing

About IIF (Indonesia Impact Fund): I currently serve as an Investment Committee member and Partner at IIF, Indonesia’s first private-led investment fund deploying in early-stage companies aligned with UN SDGs (United Nations Sustainable Development Goals). IIF was founded in 2021 by ABAC (APEC Business Advisory Council) Indonesia’s key members — Anindya N. Bakrie (also IIF chairman), Shinta W. Kamdani, and Kartika Wirjoatmodjo — in partnership with Mandiri Capital Indonesia (MCI), VC arm of Indonesia’s leading state-owned bank, Bank Mandiri. United Nations Development Programme (UNDP) serves as the fund’s impact advisor. Opinions expressed in this article are those of myself.

Despite the compelling idea of generating impact and financial return, impact investing often grapples with the problem of striking the right balance between the two.

Typically, emerging market has been the answer. Nearly half of the global impact capital, for instance, is deployed in Africa. Emerging countries tend to have pressing social and environmental problems, but benefit from faster economic growth. As such, in theory those are where transformative changes are most visible, and where impact and financial return have a higher chance to cross path.

It is also why Indonesia is highly attractive. Its qualities as one of the world’s top 20 largest economies and the largest in Southeast Asia have been well documented, including its deep social and environmental problems as an emerging country. But I believe that its most unique proposition is its proven track record as an enabling environment for opportunities that can deliver high financial return alongside impact — high-return impact.

Indonesia’s enabling quality for high-return impact is best demonstrated by the significant growth of its digital industry over the past decade. During that time, homegrown startups such as Tokopedia and Gojek emerged as the country’s first unicorns as they built businesses that have not only achieved outsized financial success, but also transformed lives.

E-commerce unicorns Tokopedia (now GoTo) and Bukalapak empower offline merchants to sell online, reach more customers, and access finance. In doing so, they solve social problems. Many of these merchants belong to the MSME (Micro and Small Medium Enterprises) category, which collectively drive 60% of Indonesia’s GDP but often face limited growth and economic opportunities.

On-demand ride-hailing and delivery unicorn Gojek (now GoTo) enable low-income “ojek” (motorcycle taxi) drivers to connect with customers through their superapp, where they can consistently receive orders. Consequently, it leads to steady and higher income for the ojek drivers.

These unicorns are Indonesia’s most successful growth stories to date, but in hindsight, a lot of their growth came from solving impact problems. Those were all hard problems that affect a lot of people, and solving them was the reason why they went zero-to-one — when you build a solution that gives people access to basic services and opportunities they otherwise would not have, you create something radically new to them. And when you can scale that solution across an emerging country of 265 million people, the growth potential is huge.
Indonesia today is still facing various challenging impact problems embedded in its critical sectors at a massive scale. Solving them in the right context, as what the unicorns have demonstrated, is the key to capture high-return impact opportunities.

For example, Indonesia’s agriculture and fisheries sectors provide double-digit GDP contributions to the economy, but over 90% of the farmers and fishers are smallholders with low living standards who do not enjoy much of the industries’ upside. They rely heavily on middlemen for distribution due to highly-fragmented supply chains, which leaves them with a smaller share of the retail price.

Healthcare, education, and financial are important sectors with typical inclusion-related problems. Indonesia’s geographical characteristic as an archipelago amplifies these challenges. The growing uptake of online-based services in recent times has improved access, but another part to the problem is the quality of usage — the use of online lending or pay later services by the unbanked with low financial literacy would lead to financially-damaging usage.

The country’s environmental problems are also noteworthy, and they are often interlinked with social problems — forest fires and traffic congestion do not only contribute to the country being one of the world’s biggest CO2 emitters, but also cause social harm to nearby communities.

These are just some examples of the big problems Indonesia is facing today. Indonesia alone needs an estimated $1 trillion of investment to fulfill its SDGs (Sustainable Development Goals) gap by 2030. To fill that gap further, deep collaboration among the private, public sectors, and the government, is critical. Decarbonization of the highly-regulated energy and transportation sectors, for example, would require sweeping policy reforms and government initiatives and incentives in addition to capital.

At IIF, we view high-return impact investing as a tool that enables our mission in mobilizing capital and sector-wide support to fill Indonesia’s SDG gap. Within the impact investment spectrum, we consider ourselves to be neither impact-only (e.g. grant-based) nor financial-only investors. Based on our commitment to advance SDGs and to deliver venture-style returns, we are probably best described as a financial-first impact investor.

We believe that for a business to generate sustained impact, it must first reach a certain degree of financial stability. Therefore, our portfolio value-creation activities always seek to optimize for the “multiplier effect” — whereas higher financial return should lead to higher impact and vice versa.

The progress has been promising. To date, IIF has made 3 investments in companies (Cakap, Delos, and Greenhope) addressing impact problems across education, fisheries, and plastic waste — all are important sectors with massive impact and growth potential.

Moreover, we also co-invested in these companies with mainstream investors, further demonstrating the mainstream validation of the high-return prospect. In fact, as we have been seeing the growing trends of mainstream capital inflows into impact, it is increasingly looking like Indonesia’s next unicorns will be companies solving impact problems. As much as the IPO exits of the unicorns may signal the peak of the current digital economy boom, they may as well signal the coming of the next one.

Source: @bennytjia via Medium

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