New Frontiers of Investing

July 13, 2012

By: vikram2012

Vikram Madan | KF18 | Indonesia

It’s been three weeks since I arrived in the bustling metropolis that is Jakarta, and I was very fortunate to have a wonderful introduction to Indonesia and Southeast Asia in general. During my first week, I attended the Wharton Global Alumni Forum in Jakarta. The Wharton Business School at the University of Pennsylvania is my Alma mater, and it happened to be a very exciting coincidence that the forum overlapped with my time here. I got to learn about the dynamism of the Indonesian economy as well as the newest forms of social investment – timely as I’m currently supporting a start-up social enterprise, PT Ruma, as part of my Kiva Fellowship.

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Indonesia’s Vice President addressing the Forum

In a session titled “New Frontiers in Investing,” I heard about the newest innovations in socially-oriented investment. It was refreshing to see the fusion between profit motive and social impact, and despite the small size or early stage of these efforts, there is clearly a foundational momentum building around the double bottom line in finance. Specifically, I learned about socially-oriented private equity investors and the creation of a social investment exchange.

One of the private equity firms, Fairways Capital, is based here in Indonesia. The firm has invested in two innovative social enterprises in Indonesia. The first caters to the savings habits of rural Indonesians. It allows them to cash in the gold that they are often stuffing under their figurative mattresses in the form jewelry, coins, etc. The other company finances fertilizer for farmers in an innovative manner. The fertilizer is provided upfront free of charge to the farmers, and then the firm is paid back after the harvest. It participates in the downside risk as well as the upside potential of the crop yield, so the mechanism alleviates some of the risk for farmers.

Another interesting private equity investor is Leapfrog Investments, which manages a $125 million fund for investments in microinsurance companies. The firm seeks to facilitate the provision of insurance to world’s underserved communities, which Lloyds Insurance estimates to range somewhere between 1.5 and 3 billion people. Among its portfolio companies are AllLife Insurance, which pioneered the insuring of HIV-positive individuals in South Africa, and Shriram CCL, which provides microinsurance and other low-cost, high-quality financial services to 10 million Indians, 98% of whom are using financial services for the first time.

The most innovative institution at the session was Impact Investment Exchange Asia, which will launch this year. The beauty of this institution is that it connects socially-oriented investors and social institutions in a central clearinghouse, which itself lends creditability to the investors and the institutions. For-profit social institutions will have the choice of listing stock shares or bonds. In the former, they incentivize the investor by paying dividends, while in the latter they will pay back principal and interest. Non-profit institutions can list bonds for which they will only repay the principal. One of the key elements of the institutional framework will be the requirement to provide investors with third-party audited financials and social impact reports.

There is still a very long path before us in terms of alleviating the significant disparity in livelihoods that exists in the world today. There is no doubt that financial markets will play a critical, catalytic role in this story. It is certainly amazing to see the innovation to date at, for example, the aforementioned institutions and other amazing organizations like Kiva, but rest assured – this is just the beginning.

Vikram Madan is Kiva Fellow stationed with PT Ruma, a social enterprise giving micro-entrepreneurs the resources they need to sell mobile airtime and other technology services in Jakarta, Indonesia. He has a broad-based interest in improving the provision of financial services to underserved communities. Find out how you can become a Kiva Fellow or learn more about Kiva and microfinance at kiva.org.