Arisaig seeks to maximise impact ‘bang for buck’ with new Next Generation EM fund

Impact

Arisaig Partners made a bold foray into impact investing in emerging markets by launching its new public equities fund, the Next Generation Fund, in early September. 

“As far as I'm aware, there's no one doing exactly this with an emerging markets focus,” says David Lanning, the fund’s head of research, adding that the USD3.8 billion ultra-long-term investment boutique had been considering setting up the fund for years.

“The thought behind the Next Gen fund is to go beyond just protecting the sustainability of long-term financial returns, and to actually back companies which are already making a positive difference to the countries that they operate in,” Lanning explains.

With the global ESG investing market growing to an estimated worth of USD30 trillion, or one-third of all professionally managed assets, most of this capital still goes towards developed markets. 

According to a recent Standard Chartered survey of investment managers, almost two-thirds of investors direct their sustainable financing investments towards Europe and North America.

In November, the UK’s largest asset manager, Schroders, announced it would launch an emerging markets impact fund focused on providing credit to banks, with the aim of lending to small businesses facing a financial hit from coronavirus.

“If you're trying to achieve impact through your investments, you should be focused on the countries where you'll reach the most people and where your investment goes the furthest in terms of the relative need of the population in that country,” says Lanning.

Arisaig Partners has been an active emerging markets investor since it was founded in Singapore in 1996, and its funds include the Global Emerging Markets Consumer fund, Latin America fund, and the flagship Asia Consumer fund. 

For Lanning, it makes sense to invest in emerging markets because of the “impact bang-for-your-buck that you get from an incremental investment in affordable healthcare in India, versus in healthcare in the US”. 

The companies in the Next Generation fund have around a 25 per cent overlap with the companies that Arisaig’s other funds own. 

He admits that emerging markets tend to mean less transparency on ESG issues due to less regulation, and as a result bear higher corruption risks, but says that excluding developing countries on this basis would be “defeatist”.

Lanning says that Arisaig’s approach is different from conventional sustainable investing strategies employed by fund managers, which include some “relatively mindless ESG-labelled products out there” which are based on simple exclusions.

The fund aims to invest in listed companies that are creating impact on the customer level with the products they offer – not because of the ESG credentials of the company itself. 

He sees this as “filling a void which is often left by the state”, across the Next Gen Fund’s six key investment themes: health, education, the environment, financial inclusion, employment, and gender equality.

Lanning gives the example of a health insurance provider in Brazil, Hapvida. The country’s underfunded state healthcare system means that Brazilians pay for private healthcare, which itself is deeply fragmented, as different companies run the hospital chains, medical clinics, diagnostics labs, and pharmaceutical providers. 

This means that “at every single level, each company is both trying to look after its own margin, but also trying to overcomplicate procedures so that it can charge more to the next guy above”.

This helps to explain why Brazil has the highest rate of mothers giving birth by Caesarean sections of any country in the world at a rate of 85 per cent of all births in private hospitals, as the operation allows the healthcare companies to charge more and also cut down on long hospital stays. The World Health Organisation puts the ideal rate for Caesarean sections at no higher than 15 per cent.

Hapvida is integrating all health provision under one company, including insurance, hospital chains, and specialist clinics, which means that they “get rid of those multiple levels of margin, and so their health care plans are 60 per cent cheaper than the rest of the market on average”. 

“That means that they're within reach suddenly for a huge portion of the Brazilian population, which was locked out of this industry before.”

Another example Lanning gives is of financial services firm Safaricom, which is helping give Kenya’s large unbanked population the ability to perform simple financial transactions on a basic mobile phone.

The fund is around 90 per cent invested, and aims to own between 25 and 30 stocks over the long term, and Lanning says there are a couple of new ideas in the pipeline. 

“Climate change is the topic for any investor, or anyone thinking about the long term. I think that that is inevitably something which is reflected in our thinking and potentially in our portfolio in the coming years as well.”