Problems and Opportunities –
The Potential of Impact Investing in Indonesia

Sagar Tandon | Saskia Tjokro

Editorial: INTRA

The pandemic has caused global economic growth to decline,1 including the ones that’s Indonesia. In the country where tourism is one of the main tertiary industry focus, as well as its main branding abroad, “Wonderful Indonesia” they say, the pandemic has zeroed the number of foreign tourists coming to the country. Throughout 2020 and 2021, its international ports such as Jakarta and Bali have become the shadow of its pasts, with people-facing industries getting hit the hardest. The need for immediate adaptation was urgent for our friends in these people-facing industries: retail, education, food and beverages, tourism, among others. 

And during this pandemic, one article strucked. As of June 2021,2 there are 16 unicorns and decacorns in ASEAN countries.3 This figure is fairly large if compared to pre-pandemic unicorns growth. Of the total, Indonesia contributed 7 new unicorns. Among one of these, surprisingly, is one of the startups whose industry got hit the hardest: tourism and travel. This brings us to the very basics of startups as a high-growth business: the ones that are meant to disrupt the market. 

And this is directly related to what we see in other sectors: how online technology lenders (part of fintech) companies grow, how online education models democratize access to knowledge to the most remote areas trending, and the growth of unicorns providing additional income to vulnerable people or SMEs.

The catalytic role of digital infrastructure

In impact investing cases, since 2015, ANGIN has witnessed some exciting trends changing the development of impact investment in Indonesia. Beyond the logical relationship of seeing impact investors investing in social enterprises in ANGIN report last 2020, we saw mainstream investors (e.g. VC, corporates, private equity firms) also investing in the same social enterprises. The pandemic has accelerated the impact of investing intentions, even by mainstream investors.4 Impact investors are not anymore the only ones financing the growth of impact entrepreneurs. In a similar pattern, numerous entrepreneurs not being defined as social enterprises (or not being aware of this jargon) do have an important contribution to impact and the SDGs’ achievement. 

As the impact investment extended its wings to emerge as a new conception of Investing in impact where this impact becomes an arbitrage, an opportunity, a “new normal” in Indonesia.

Infrastructure-wise, Indonesia internet penetration has grown systemically so much these past years. The country built two digital connectivity megaproject pipelines aiming to connect the east to west side of the archipelagic country. This obviously contributed to the digital connectivity usage, including enabling homegrown innovations to shine.

More problems = more opportunities

Beyond the pandemic response, though, there are several issues with investment – financial capital access in Indonesia. The country has underlying issues to be addressed, called market gaps if we may, that can potentially be addressed by the non-government sector (a.k.a private sector, a.k.a. social entrepreneurs). Based on the growth of the unicorns above, more problems to be solved seems like a more opportune point prevails.

Alternative financing beyond banks

The first opportune issue is the gap within the financing sector beyond the banks. As is, there is a potential gap with liquidity in Indonesia. The Indonesian MSME entrepreneurs generally lack access to finance from banks due to the administrative requirement which unfit the characteristics of the high-growth MSMEs. For example, no prioritization on cash flow and lack of collateral due to the asset-light operations., whereas some may have all the potential to grow well beyond their current volume. This issue, addressed by entrepreneurs with impact intentions, provides a great opportunity and demand for funds that specialize in investing in the kind of startups that provide lending activity that’s handled by various entities aside from banks. Generally referred to as private debt funds, e.g. Beacon Fund, a debt fund that focuses on creating access to debt products for women-led enterprises, translated as gender lens in impact investing. In addition, while the Indonesian government’s intentions to alleviate the suffering of high-growth enterprises during the COVID crisis might not be enough if compared to the total entrepreneurs that’s affected, banks have started dramatically cutting back on issuing credit, thereby kicking off a period of more cash shortage in the economy. 

The rise of gig economy

Second, there is job insecurity. Indonesia never had the secure jobs that the gig economy is supposedly displacing. If anything, we can quite safely predict that the share of gig economy workers will continue to grow in Indonesia. The new Indonesian Omnibus law stamped it clearly, that freelancers and contract workers are reachable even to the most corporate type of institution. The gig economy approach is favored by the human capital available at disposal in Indonesia, which is extremely good in compartmentalizing, low stickiness to one job, and higher risk appetite. We believe the future of work will be decentralized and more local, wherein gig economy workers are going to continue to grow in Indonesia. This leads to a new opportunity for entrepreneurs to focus their products to impact marketplaces and platforms that create employment at scale with a gig economy approach.  

This gig economy solution varies across sectors. Solutions like online health consultations grow, also edutech (whether its informal courses or even formal education platforms) providing distance learning and reaching the never-imagined-before accessibility to its target users. SDG-wise, these gig economy-based solutions answer the impact needs from cross-cutting SGD points. For instance, Gender Equality with Sustainable Consumption with Decent Jobs.

Health and lifestyle trend

With covid hits, there is a higher understanding of health and environment among especially the new generation of Indonesians. This prevails a new layer of impact trends such as plant-based diet solutions, healthier lifestyle solutions, circular economy solutions. In short, the impact opportunity also comes from the need to have options, to be able to make better consumption decisions. This also includes the agricultural sector solutions, which newer generation laser pointed it from its value chain perspective. 

Strengthening economic resilience 

We believe the emerging impact ventures in the FMCG, international trade, and agriculture will play a critical role in improving Indonesia’s Economic Complexity Index (ECI),5 i.e., creating a competitive moat for Indonesia’s economic growth. Hence, it improves economic resilience and food security. 

Impact Investing in Indonesia is in its infancy

And like an infant, emerging market, there is so much room to grow. So much opportunity to drive it right. To make cases of lessons learned. Indonesia is the largest and fastest-growing Internet economy in Southeast Asia, with more than 150 million internet users. The middle class has been growing faster than other groups; there are now at least 52 million economically secure Indonesians or one Indonesian every five. Comparing Indonesia with the whole Southeast Asia, Indonesia accounts for 40% of Southeast Asia’s economic output and population. It is the single largest integrated market of the region, coming in third after China and India if we look at emerging Asia as a whole.

In the impact investing practice itself, so far, most managers are by and large sector agnostic generalists. We have not seen many theses and sector-focused funds that can provide stewardship beyond sourcing and selection to impact funders. We also need to note that:

  • becoming unicorns is only one growth path and not the only growth path. There are many different growth paths, e.g. becoming sustainable, successful acquisition, etc. We have acknowledged some private debts and other alternative instruments, like we mentioned Beacon Fund, which is not always talking about the unicorn-like startups as the investment endgame.
  • The discussion of high-growth social entrepreneurs goes beyond digital tech solutions only, they are just one example of success stories that we have seen in Indonesia.

We have seen chiefly spray and pray funds with a highly diversified portfolio approach and meager hands-on support in the impact investing ecosystem. The country’s well-documented talent paucity generates too little pipeline of new impact enterprises and a high ratio of enterprises failing to execute. It makes it an inappropriate situation for a very diversified portfolio approach. Hence, we need more high conviction fund managers that provide a high level of portfolio support. This goes back to what we stated above: more problems, more opportunities.

On the other hand, in the general case of investing, the local venture capitals (OJK-licensed PMV) are actually the ones who are less likely to provide equity. There is also a case of impact impact enterprise founders who are more choosy to take in equity capital from just any private investors (need to make sure the vision aligned, etc.), making them susceptible to getting stuck in a “slow growth trap,” limiting their scale. It is beneficial to consider innovative financing structures like variable debt, revenue share, self-liquidating debt, and other mezzanine instruments. So far we have not seen much activity happening in innovative impact financing in Indonesia. 

Of course, the understanding of these instruments’ solutions is directly related to the country’s talents within the impact investing space. To take note, as it’s an emerging market (for impact investing), there is a scarcity of talents that can potentially be solved by the government and private sector strengthening higher education in Indonesia will be required, and hence INTRA career development part will be helpful. Again, this is a case of more problems and more opportunities. These are the rooms for key stakeholders to take note of. The regulators, the impact investors, the planners, the social enterprises. In the meantime, we do see more people to tap into this impact opportunity. The global talents, the innovations, the diasporas. We do not have the same issue when ANGIN’s MD David first came to the country 7 years ago: because nobody understands what the impact investing was about, or the fact that Indonesia was not interesting in the eyes of global impact investing communities. Fast forward to 2021, Indonesia is clearly a space to watch in terms of impact investing activities.

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1Pernyataan Kementerian Indonesia mengenai peluang investasi di Indonesia https://www.bkpm.go.id/en/publication/detail/news/great-investment-opportunities-and-economic-growth-why-invest-in-indonesia
2 https://bigalpha.id/news/ada-anggota-baru-ini-daftar-unicorn-indonesia-paling-update
3 https://www.dfat.gov.au/international-relations/regional-architecture/asean#:~:text=ASEAN%20brings%20together%20ten%20Southeast,and%20Vietnam%20%E2%80%93%20into%20one%20organisation.
4 Laporan ANGIN https://www.angin.id/2020/10/05/investinginimpact
ECI (Economic Complexity Index/ Indeks Kompleksitas Ekonomi) mengukur intensitas pengetahuan relatif terhadap suatu perekonomian. Perekonomian Indonesia memiliki ECI sebesar -0,306 menjadikannya negara paling kompleks ke-71 (dari 130. Dibandingkan Malaysia, peringkat 25, atau Thailand, peringkat 32, India, peringkat 45 – atau bahkan Filipina, peringkat 43 pada 2017).