It was announced last year, Sarona Asset Management would be tasked with managing the Australian Government’s Emerging Markets Impact Investment Fund (EMIIF), which is the Federal Government’s first foray into fund-of-fund impact investment in Asia, Southeast Asia and the Pacific.
OnImpact had an opportunity to speak to Serge LeVert-Chiasson, Managing Director of Impact at Sarona, to get a deeper understanding of what EMIIF hopes to achieve, and the unique approach of Sarona as a catalyst for positive change.
The Sarona Origin Story
The Sarona origin story goes right back to World War 2, when its parent organisation was founded by the Menonite community in the US and Canada. It was 1953 and they were trying to help those fleeing the war.
The group saw Menonite refugees fleeing to Paraguay, and they wanted to help. They identified one group trying to build a dairy operation in Paraguay, but these were Russian and Ukranian Menonites, and they didn’t want a hand-out, so instead, they asked for an investment. And without needing to have any language around ‘impact investing’ the group offered a loan and helped the company get on its feet.
“It’s an interesting origin story because it ties together our understanding of the needs of local markets, providing them with the capital that they need to grow their businesses, but also, to recognise that we can offer knowledge and expertise that can support those local businesses.” Serge explains.
Sarona grew from this early experience as an asset management group that specialises in building fund-of-fund structures for private investors. It launched as a standalone entity in 2010 when it was spun-out from MEDA.
MEDA is a full-service international economic development organisation, it’s focussed on technical assistance and capacity building for businesses on the ground. And for the EMIIF project, MEDA has been engaged in a technical assistance role, along with another partner, Volta. But more about that later.
Investing in the Success of Other Investors
Sarona isn’t your normal impact investor, Sarona is a specialist fund-of-fund investor. This means that rather than investing directly in a social enterprise, they instead identify other investment managers, they then deploy capital from a private investor into a collection of those funds.
“We’ve essentially been tasked with finding the right investment partners in Southeast Asia, to support the Australian Government’s objective of creating an ecosystem of local partners. Those that understand the importance of women in building high-impact businesses, as well as economic development writ large.” Serge says.
The key impact potential is their managerial value-add. Sarona helps to build capacity in these investors, to make them better impact investors, while also offering a valuable service to the asset owner who wants to deploy funds for maximum impact.
“Our additionality, or theory of change, is really around transforming those managers. And through hard work, dedication and commitment on our part, to show these managers the importance of considering environment, social governance, as well as impact, in the way that they make investments. To show them that it’s not just good for the community, but it’s actually good for shareholders as well.” Serge says.
To be clear, they do also co-invest directly in companies alongside fund managers. But their core skill-set is in supporting fund managers, and building high potential fund-of-fund structures.
“In this way, we think we can actually have a bigger impact. It’s not as direct and immediate, perhaps as when you have a number of social enterprises that you have a controlling interest in as a fund manager. But if we can do our job correctly, we can sew a number of seeds within these particular fund managers, and show them how important it is to consider these broader impact issues.”
In some ways this structure makes Sarona even more accountable for their impact management practices because they need to set an example for the managers they’re tasked with influencing.
“We recently became a signatory to the Operating Principles for Impact Management, also known as the Impact Principles, that were led by the IFC. They’re a Global Compact of sorts, but for impact investors. A key element is thinking through how you instil impact in everything you do, from your pipeline, right through to an exit. And so we’re constantly on the lookout for how we improve as an impact investor, and how to encourage our fund managers to sign up to some of these initiatives as well.” Serge explains.
The EMIIF Structure
The other key factor that makes EMIFF unique is that the core capital is coming from only one investor, and that’s the Australian government.
“The way EMIIF is structured, could most likely be classified as a separately managed account, because it’s only the Australian government that is the investor. It’s set up as an Australian trust, with a trustee, and there’s a custodian. And then we’re the investment manager in that relationship. The corpus that’s been committed by the Australian Government stands at $40 million. It also incorporates $4 million for technical assistance and that’s being administered by MEDA.”
The whole project is focussed on developing the capacity of both impact investors, and high-impact businesses. And for that, Sarona has brought in some help.
“Volta is a UK base group that specialises in providing impact investment support to fund managers. Volta will be dedicated to providing that technical assistance to the investment partners.”
“MEDA, on the other hand, will be working with the portfolio companies directly. They will be providing support to empower women in those businesses, as well as identifying ways to create value for them, both in terms of revenue increases or boosting production. All the while, they’re focussed on asking, how do we create more revenue for you by creating products for women? Or, is there a way to improve productivity by engaging women in your workforce in a more efficient way? It’s really a gender lens investing value creation agenda.”
“So there’ll be added technical assistance benefits at the fund manager level through Volta, and at the portfolio company level through MEDA.” Serge explained.
The Origins of EMIIF
It was 2017, Julie Bishop was Minister for Foreign Affairs, and she was on stage at the Impact Investment Summit where she announced the Emerging Markets Impact Investment Fund (EMIIF). For the assembled crowd of Australia’s most enthusiastic impact investors, it was a proud moment, to see the federal government backing an initiative that harnesses private capital to help small businesses to thrive.
Since then it seems clear it’s been a lot of hard work, by a group of very dedicated public servants, to get EMIIF to where it is today.
“Kristy Graham, who leads the private sector economic team at the Department of Foreign Affairs and Trade (DFAT), is a force of nature in terms of understanding how the government works, but also trying to get a programme off the ground that’s never been done before, at least within an Australian government context.” Serge says.
After Sarona was announced as the project’s lead fund manager, in mid-2020, it was then received the announcement of the Investment Committee at the start of 2021.
“Once the Investment Committee was constituted in February of 2021, we quickly started using their services in looking at some of these opportunities.” Serge says.
The Investment Committee includes; Kylie Charlton, Jeremy Cleaver, Maud Savary-Mornet, Gerhard Pries, as well as Serge LeVert-Chiasson.
Serge hinted that they were close to identifying their first investment partner, but… he wasn’t able to offer any names just yet. You can rest assured we’ll be reporting on the first addition to the portfolio, so stay tuned.
A Pilot – A Platform for Economic Development
Impact investing is hard enough for individual investors, let alone for a national government that must balance politics, foreign affairs, as well as the complications of constitutional law. But EMIIF is a very promising start, one that’s broken down walls, and building sturdy foundations.
“In the end, the aim is to build a really solid platform for the Australian Government to operate from. And if this grows right, if the Australian government decides to grow it further, they will have a much more efficient system enabling them to put more good money to work to benefit a whole range of objectives.”
“But of course this isn’t a huge amount of money. And this programme will only really have about 25 million, Australian dollars to invest, when you consider some of the other costs that are associated with the management of the corpus, and of that will probably only make about six investments.” Serge says.
While this may not be a huge allocation of funds in the context of a wealthy country’s aid spending, it is a big step into the unknown. And most importantly, it’s very different to committing funds to an aid project, and that’s largely because this project may actually return money, while also delivering vital social contributions to neighbouring countries.
But of course, the intractable problems that aid projects seek to remedy, require a multi-pronged approach.
“I’ll be very careful and say that impact investment is not a panacea, it is not the solution to all ails. It is one tool amongst many. Like when you build a house, you need a whole range of tools, you need saws, you need hammers, you need rulers. And the same is true in development.” Serge says.
Optimism for Economic Growth in South Asia
There’s a certain optimism in deploying funds with the hope of growing it, as much as wanting to build capacity and aid local communities. With a focus on the private sector, EMIIF is betting on the strong prospects for the regions in which it’s investing.
“Emerging markets aren’t the same as they were in the 1950s and 60s. They’re no longer quiet, desolate places. Nowadays, when you go to a place like Nairobi, or Jakarta, there’s a certain energy and potential and positiveness to those places. And with the right talent, and the right business approach, impact investment can be one of the solutions that helps empower the poor, and develop communities in the right way.”