Differences as differentiators: Diversity gives fund managers investing edge

Having investors of different genders, backgrounds, and perspectives gives fund management teams a clear advantage, a group of high-profile LPs agreed in a recent discussion hosted by Investing in Women, an initiative of the Australian Government.

Fund managers that comprise diverse team members, they agreed, are better placed to identify unique investment opportunities and manage risks effectively.

The discussion, titled The LP Roundtable – A Peer Exchange Network for SEA LPs, was part of DealStreetAsia’s Asia PE-VC Summit 2024 event held in Singapore. Attendees represented premier LPs such as Flexstone Partners, Malaysian pension fund EPF, Siguler Guff, JP Morgan Asset Management, Mizuho Bank and Mitsui & Co. 

Their view on diversity, particularly as far as gender diversity is concerned, is backed by a 2019 report by the International Finance Corporation (IFC), RockCreek and Oliver Wyman, which found that private equity and venture capital funds with gender-balanced senior investment teams generated 10-20% higher returns compared with those with a majority of male or female leaders.

A possible reason for this is that women tend to offer differentiated knowledge, experience, network and other resources, compared to men, as some have noted.

However, Southeast Asia is finding it tough to make any significant progress towards such an end. A recent report by DealStreetAsia found that only about 18% of investment decision-makers at Southeast Asia-headquartered venture investment firms are women.

Some have reasoned that this could be due to several factors, such as the legacy of the tech industry as a male-dominated field, the lack of support and resources for women who choose this line of work, and a non-inclusive work culture.

However, diversity goes beyond gender, the participants noted. According to the latest McKinsey Diversity Matters report, companies in the top quartile for ethnic diversity have, on average, a 27% financial advantage compared to others. Conversely, those in the bottom quartile for ethnic and gender diversity are now 66% less likely to outperform, up from 27% in 2020. This suggests that the financial impact of lacking diversity may be growing.

This was echoed by The Radical Fund’s Alina Truhina in a recent interaction with DealStreetAsia: “It is important to remember that diversity is not just about gender, but also encompasses lenses of race, neurodiversity, socio-economic background, and even education! Building teams and portfolios that are diverse leads to more successful results, which is now proven with clear data.”

Trends taking off

Investing in Women’s lively round table discussion also saw participants sharing their views on emerging trends and sectors across Asia. One of the trends that evinced the strongest interest was the development of artificial intelligence (AI).

The frenzy around generative AI in Asia was inevitable, given the considerable boom it saw unfolding in the US, most notably spurred by the launch of OpenAI’s ChatGPT chatbot. The swarm of investors putting money into AI helped the US market reverse the downward VC funding trend, which began in 2021. 

China quickly caught on and, by 2023, had produced at least 130 large language models (LLM), accounting for two-fifths of the global tally, per CLSA data. The country’s tech titans jumped on the bandwagon, with Alibaba Group backing the so-called “five tigers” of LLM: Baichuan, 01.AI, MiniMax, Moonshot AI, and Zhipu.

In a letter to its shareholders, Alibaba went so far as to state that AI “is the single most powerful element that will change and accelerate the growth of our business”.

The LPs in the Investing in Women session noted that while AI continues to excite investors, there are concerns about the lack of local talent in Southeast Asia.

Industry players and regulators alike acknowledge this challenge, and several countries in the region are slowly making moves to address it. One market that may be worth keeping a close eye on in this regard is Malaysia.

Earlier this month, the country’s prime minister, Anwar Ibrahim, announced a set of policies that aims to position Malaysia as a “hub for generative artificial intelligence”. 

The country plans to create a national cloud policy and introduce regulations for the ethical use of AI. It also looks to set up a national AI office to coordinate initiatives, including a five-year technology action plan and regulatory framework to increase the adoption of ethical and sustainable AI within the next 12 months.

Another trend that became a topic of discussion among LPs in the Investing in Women session was that related to sustainability and ESG, which is taking off in Southeast Asia.

According to DealStreetAsia’s SE Asia Deal Review: Q2 2024, carbon exchanges and carbon analytics platforms have attracted investments worth over $300 million since Q2 2023.

In the first quarter of this year, the region saw 12 greentech funding deals across different industries, such as renewable energy, waste management, carbon exchanges and carbon analytics.

However, players are struggling to step past some of the hurdles in the sector. In the global carbon market, challenges have arisen in setting a standard price, verifying carbon credits, and managing oversupply. Additionally, creating a liquidity pool of contracts and projects for an exchange has been difficult, as has attracting buyers and ecosystem partners for voluntary carbon credits and renewable energy certificates.

More investments must be made to help industries in the sustainability space address some of these issues and flourish. Still, mainstream private investors often fail to see the commercial appeal of such sustainability endeavors.

To make impact enterprises more attractive to investors, the region has started to turn to blended finance as a de-risking mechanism, in which public and private financing are combined to encourage private investments, particularly in emerging markets.

Exit challenge

Nearing the end of the roundtable session, participants delved into a topic that has been a longstanding obstacle for many fund managers around the region: exit opportunities.

Typically in Southeast Asia, the preferred exit route for investors and investees alike is through a strategic sale. However, given the market slowdown over the last few years, such trade sale exits have been few and far between.

To achieve a successful exit in the current bear market, it may be wise for companies to involve strategic investors and potential buyers earlier on in the journey to give them better company visibility and instil more confidence to get a deal sealed. 

As far as IPOs are concerned, international bourses remain the preferred destination for regional companies, given their relatively deeper capital pool and more diverse investor base. A popular option for many Southeast Asian companies has been the Hong Kong Exchanges and Clearing Limited (HKEX). As many as two-thirds of all international companies listed on the exchange are Southeast Asian.

Interestingly, despite the liquidity crunch, Asia’s private equity market is seeing increased buyouts.

Blackstone Strategic Partners managing director Eric Tam recently told DealStreetAsia that there are more buyout deals available in the region now, thanks to an increase in funds and the maturation of sponsor-backed assets. This has created opportunities for secondary players to enter the market and offer liquidity to investors holding older but attractive portfolios.

“Funds raised 10 years ago in Asia were more focused on venture capital and growth strategies, and only recently there have been more funds focused on leveraged buyouts and infrastructure strategies in the region,” he said.