Temasek’s $500 million investment into impact private equity firm Leapfrog in March could be followed by other indirect and direct investments in the impact investing space, according to its head of the business. Plus, the sovereign wealth fund's investment should help to bring impact and sustainability investing further into the mainstream, believe investment industry experts. 

Benoit Valentin, Temasek:
committed to ESG 

The acquisition gives the $214 billion Singapore state fund an undisclosed minority stake in Leapfrog and a non-executive seat on the board. Despite this, Benoit Valentin, head of impact investing at Temasek, told AsianInvestor that Temasek will “have no role on the LeapFrog executive committee that oversees the operational running of the business, nor any role in investment decision making” (see below for full interview).

LeapFrog, which has raised over $2 billion from global institutional investors since it was set up in 2007, allocates private equity to purpose-driven businesses and Asia and Africa through four funds. In a recent media interview, partner Fernanda Lima said the firm targets an internal rate of return of 25%, in line with other PE growth funds. 

“There is an urgent and pressing need to address the critical social and environmental challenges that the world is facing,” Valentin said at the time of the Leapfrog announcement. “We believe in the potential of impact investing to unlock the capital to meet these challenges.”

Javier Capapé, director of sovereign wealth research at Madrid-based IE University's Centre for the Governance of Change (CGC), believes the decision by Temasek to step into impact investing in such an overt manner could pave the way for other institutional investors to enter the asset class, while also encouraging reliable metrics to better measure the positive effect of impact investing.  

“Temasek has the capabilities and experience to explore this new frontier asset class,” Capapé told AsianInvestor. “They want to shape their portfolio based on social progress in line with their goals of rising affluence and sustainable living.

“Impact investing will not only allow them to do that but also to measure the progress made on social elements such as job creation, poverty alleviation, and healthcare access.”

Javier Capapé, CGC:
Temasek may be a trailblazer

ENTERING THE MAINSTREAM

Temasek’s minority purchase into Leapfrog marks the biggest investment in an impact manager to date, according to the Global Impact Investing Network (GIIN). The fund said it will have no influence in the operational running of the business nor its investment decisions.

The acquisition is not Temasek’s only advance in the sustainable investing arena. In 2019 Temasek Trust, the philanthropic arm of the state investment fund, set up ABC World, a private equity looking to drive change in line with the United Nations Sustainable Development Goals. In its inaugural report, released in March 2021, ABC World says it has deployed S$98 million ($73 million) across five investments.

The Singapore state investor has also been making strides in the alternative proteins space, with stakes in several plant based-food companies including Next Gen, V2food and Impossible Foods.

Impact investing is slowly entering the mainstream of the investment industry, driven by a wider acceptance that the strategies can be profitable as well as doing social good.

Asset managers T. Rowe Price and J.P. Morgan launched impact funds earlier this month. GIIN estimated that the total size of the global impact investing market at $715 billion as of June 2020.

The appeal of impact investing among asset owners may also be gaining traction as a result of the effect of Covid-19. The latest sovereign wealth fund report by the CGC, released in March, said the pandemic has accelerated sovereign wealth funds’ shift towards sustainable investment strategies, by highlighting the damage that unforeseen risks can have on economies.

AIMING TO MAKE A BIG IMPACT

AsianInvestor asked Benoit Valentin, Temasek’s head of impact investing, about the state investment fund’s plans regarding Leapfrog and its broader impact investment strategy.

Q Temasek recently took a stake in impact investor LeapFrog to support its expansion and “anchor future funds”. Can you discuss the investment focus of these upcoming funds?

Our strategic partnership with LeapFrog will take the form of a multi fund commitment by Temasek to anchor LeapFrog’s future funds, with a focus on areas such as financial inclusion and healthcare. Temasek will also take a minority stake in LeapFrog and provide growth capital to support the expansion of its team and capabilities across Asia and Africa.

Q How will Temasek use its seat on the board of LeapFrog?

Through our minority stake in LeapFrog, we will participate in the fund’s governance through a non-executive director seat on LeapFrog’s board. Temasek will have no role on the LeapFrog executive committee that oversees the operational running of the business, nor any role in investment decision making. LeapFrog will continue to be managed and controlled by its team of partners.

Q Are there any particular markets in which Temasek sees greatest opportunity?

Our impact investing team will look for investments in sectors that can contribute to the [United Nations] social SDGs (Sustainable Development Goals), such as financial inclusion and healthcare, and prioritise underserved markets such as Africa, India, South East Asia and potentially Latin America.

Q Going forward, what is Temasek’s strategy for expanding its impact investing activity?

For a start, we will focus on investing through funds that are aligned with our impact strategy. Over time, we will look to make direct investments in the space through co-investments with partners, or individually.

We are looking for impact investments that deliver measurable social impact together with strong financial returns. The investments will be in line with Temasek’s investment philosophy and reflect our structural trends, such as sustainable living and longer lifespans, as well as commitment to both Environmental, Social and Governance (ESG) considerations and the UN SDGs.

In the near term, while we will look to deploy more capital across leading impact funds aligned with our objectives, ABC World Asia and LeapFrog are two core pillars of our impact investing strategy. Both are focused on delivering impact outcomes in addition to financial returns. ABC World Asia is focused on Asia while Leapfrog covers both Asia and Africa.

The Q&A has been edited for brevity and clarity.