Tsao Family Office builds a theory to go with its practice of impact investing

I'm David bank and from Impact Alpha. This is an Agents of Impact podcast.

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Why have Impact Capital at all? Why we need Impact Capital mostly because non Impact capital won't fund stuff that we're funding.

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That's Brian Goh of the SAO Family Office, the social impact arm of the family behind Singapore based maritime company sow. The company itself says it is guided by a well being mandate and an awakening journey from I to we. The Tsao Family Office was established several years ago to fund the family's two foundations through sustainable investments.

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Just over half of its portfolio is

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impact and sustainability focused, including about 15% in Deep Impact. The Sow family office is a founding partner of Impact LP and Impact Alpha's platform for asset owners for whom LP stands for leadership potential. Let's jump right into our conversation.

0:43

Brian Goh, welcome to the podcast. Hello.

1:01

Glad to be here.

1:05

I'm so excited to talk with you. We've been watching the South Family Office and SAO Pao Qi Group, I guess TPC and Singapore more broadly and so very excited to dig in. Tell us a little bit just about the family office and the family and how you came to to to be working with them.

1:07

Yes. TPC used to be called AMC and TPC is the operating business of the family and they started in shipping in the 1920s, reinvented themselves in Hong Kong in the 1940s, drifted south to to Malaysia, helped to build the national carrier there and then finally ended up here in Singapore. That's that's head importance post Covid but they've evolved into a huge industrial concern of which shipping is still part of it. The Family office is separate from TBC and is their charitable trust effectively. So I joined in 2019. The family office before that was pretty much a Treasury function, mostly in cash. So I had all of 2019 and 2020 to build a team not just to invest but to invest with an impact mandate which was the mandate that I was given in 2019.

1:26

Tell us a little bit about the mandate, like how was that described to you or what was the charge you were given?

2:31

It's a very interesting one because it wasn't at first amended was a family charter and it was family charter not designed for investing but for how the family held itself out in society and in business, which in society and business is very interlinked in Asian businesses and particularly with the child families business being large employers being a shipping concern. But really it wasn't an investment mandate, it was a charter. The first thing I had to do is take that chart and translate it into a recognizable and practical investment mandate.

2:36

And so just tell us about how you did that.

3:17

The Charter spoke about principles. They took those principles and mapped them. At first the concepts of ESG and then impact, which I felt were distinct concepts, related, but this thing at the same time, and I didn't have any resources in ESG impact. So the first thing we did was to plagiarize from the Norbank process because they were kind enough and I guess it's their intention to proliferate their principles. So we started with exclusions, exclusion lists. And then as we invested in liquid markets on that basis, it became. It became pretty clear that we needed internal resources. So we hired a small team to further our impact interest. So today we have a full multi asset global strategy that includes private markets and public markets. And it's in private markets where we have the greatest influence or impact, if you will.

3:20

And I know you have a background too, with First Avenue Partners in London in alternatives. So this is all somewhat familiar to you, but maybe a little bit different with an impact spin.

4:30

Yes. First Avenue is a private credit and infrastructure specialist placed in agent. Right. But it was purely commercial. First Avenue had nothing to do with the SG or impact, certainly at the time. So that experience, I think is very helpful for my commercial and financial agenda. But I really had to learn the impact ground up, you know, from scratch. And I think it's helpful. I like to learn things, any kind of thing from first principles, whether it's structured credit or commercial investing, and applying it to impact investing. First principles has been enriching because you hew closer to principles, you re examine orthodox ideas and challenge them. So we started out, you know, following the Norwegians bank policies and processes, but we've grown beyond that and we're actually in the process of revamping how we think about impact and trying to meld that to an economic theory so that what we do is rationally sound and we don't end up crowding out capital or having unintended consequences.

4:42

Well, tell us a little bit more about that. It sounds like you had a practice and now you're pulling together a theory. Just tell us what the elements are.

6:00

Yeah. The theory is not to overthink things, but to make sure that when we go about our origination and our underwriting, that we don't lose our weight, we don't waste capital because capital is such a scarce resource.

6:09

Right.

6:24

So the first thing is, why have impact capital at all? I mean, why do we need impact capital? It must be because non Impact capital won't fund stuff that we're funding. So the broad definition of impact capital to me is we're funding stuff that people want, but they don't want to fund. It must be that which takes us into the realm of public goods, which we know is very dangerous to fund because economically and rationally you don't get a good outcome unless there's regulation at the end of that. So that's public goods. But then the other thing is that people are maybe a little bit shy in funding are things where the outcome or the trajectory is uncertain and large pools of capital have a responsibility to de risk or to absorb the risk of such projects and such endeavors. So, you know, whereas we were very happy to invest in concessional capital, provide conceptual capital, we tend to be more market, we tend to move up the risk spectrum because that's a more efficient use of impact capital.

6:25

And so how do you think about those kinds of risks? There's a lot of talk about mispriced risks and folks that might have a view on what those real risks are in different markets or different sectors.

7:39

Well, first of all, the rationale for taking more risk is that there is a concept of diminishing marginal risk aversion. So the bigger the pool capital, the more risk you can take and the more risk you should take because. But not just the impact doesn't happen just where we fund, but we're reversing one of the ills of inequality, which is the inequality causes over saving. It dulls the informational efficiency of an economy. So we're very careful where we fund, that we don't distort things. We're always thinking where we invest. Are we displacing purely financial capital? Are we replacing capital that we invest? In any case, we don't want to fund there that doesn't need our funding. We're intentionally looking for stuff that's where the market is a little bit shy, where our capital is, where it's our capital that's additional. It's not just the project or the business that's additional.

7:50

One of the investments that we thought was interesting was TLG Capital, which is an interesting private credit play in Africa. And I believe you were the first commercial investor. There were some development finance institutions. And also it was interesting, a Singapore investor investing in Africa. So tell us how you thought about that particular deal

8:57

from a number of dimensions. One of the primary ones was, you know, we've been doing impact in, you know, globally and we've invested in climate in the US in energy transition in Europe. But it's our intention to do more funding and more investment in lower income countries. And, and that's the inequality theme at the same time. Right. So here was this opportunity to, to fund areas where per capita GDP was a tiny fraction of global averages. And actually it made the impact thesis a little bit easy. This was an easy underwrite because, you know, and these levels of wealth or poverty, you check so many boxes with your capital. I mean just if you were a purely commercial investor, just the development and the employment that you create is sufficient. You're going to touch so many SDGs. I mean if you were mechanically mapping the SDGs, you'd hit a whole bunch. So that was an easy on the Right. And commercially it appealed also because the returns were the expected returns, returns that we expect, I think pretty attractive given the type of risks that we're taking. And we also fill a big plug and economic inefficiency, which is the shortage of catch, not the shortage of risk. It's funny quote, in some markets where the banking system has appetite for risk but doesn't have enough cash, so we're in a sense renting our cash off.

9:19

So as I understand it, you have a way of categorizing the holdings. A little more than half is in impact and sustainability focused assets and then 15% part of that falls into what you call deep impact. So tell us about how you think about the deepest end of the pool.

11:02

Yeah, so we categorize according to industry norms, which I mean loosely mapped to the impact frontiers taxonomy. And we have roughly updated numbers are something like 18, 19% in contributing to solutions, which maps to the impact. Sustainability is another 20 to 23% and then oiling arms another 20 to 23%. So you know, impact and ESG assets have become the majority of our assets. So that's if we just simply use that taxonomy. But beyond that, we're also looking at what's the purpose of the category beyond a mechanical classification according to rules. We're asking is our capital additional? Not only is what we're funding additional, but who's founding this if not us? Is something that we're asking all the time.

11:23

And then you have another category, I believe called Innovation Labs. Those are the real moonshots.

12:25

Yes, it's a small portfolio. It's in the hands of our head of sustainability and impact. She has a free hand to do whatever. And the purpose of that capital is not so much a financial return, excellence, financial returns, but least of it. But what kind of impact can we achieve in really innovative stuff that's never been done before, not tried. We're doing the trying, we're doing the testing with that capital.

12:32

The kinds of ideas that the investment committee might not otherwise approve.

13:04

No, I'm pretty sure they won't. But the idea of this capital is to do a very small ticket and see if it works. And if it works, that's where the more conventional capital, where we would go to the investment committee and say we want to upsize this because it's worked, it's had the following impact and it might make a good return. So it's sort of like a scout, a forward scout origination tool.

13:09

Right. And that's sometimes the rarest capital to find is somebody willing to take that early bet.

13:38

Yeah. And that makes it valuable. And I mean for us the education is worth more than the money.

13:47

And what's the trajectory? Are you looking to dive deeper? What does the next 12 or 24 months look like in terms of things that you're aiming for?

13:53

So in the first couple of years. So as you might recall, we got started in 2019, the first couple of years, the approach was why the challenge? Because we were in the process of discovery and as we go along there are areas of interest that we can go a little bit deeper. So we're at the point where deployment might slow down because we're changing our standards into what I think is a much deeper involvement engagement where we're demanding a coherent, consistent theory of change for everything that we invest. And we require ourselves to have an internal theory of change that we can benchmark or map JP's theories of change against to see there's alignment and we're not, we're not asking for 100 alignment. I think that's asking too much and that might be a little bit vague because we're not always right. We know that and you know, our theories, our beliefs will be shifted by our engagement with GPs as well as we learn. But it's going to be a lot more rigorous is how I would say

14:06

just give us an example of in one sector a theme of a theory of change and how you go about it.

15:17

Let's pick one which is really a gray area, which is investing in culture. How might culture aid the SDG agenda? I think that it can be very impactful. That's a field needs to be validated. Right. So one can take what GP presents at face value or one can ask the theoretical questions like demonstrate real world cases where culture, by touching and influencing large numbers of people, change the way they think change the view, impact how people see the world and therefore bring awareness to the SDGs. And it's not just in investing. Investing is just one way that in terms of, well, actually consuming it probably has a greater impact on businesses. CEOs if you don't buy their bonds or you don't buy their equities. Okay, they get it. It's a little bit of an irritation. You can buy their stuff. It's a big problem.

15:25

Right.

16:34

So there is a. I can see a theoretical connection between using culture and it's a mass influence. But then how do you measure it? So these are things that we're going to develop and as we originate GPS in that space, we're going to map the those theories change to our own. This is a work in progress, which is why I guess really excited about it.

16:35

I imagine just by articulating a theory of change around culture and letting GPs know that there is a LP that is interested in that strategy might surface some interesting managers eager to fulfill that strategy.

17:09

Yes, early days. So we haven't seen many gps in this direction. What we have seen on our foundation side is nonprofits in this space. So we're trying to see we can somehow marry the two and have an

17:28

investment case as well as cultural projects. Tell us more about Singapore and the context there. We've been watching, of course you, but also Temasek and GIC and other big investors in Singapore really leaning into climate transition and even now more of the S in ESG as well.

17:46

Yeah, Singapore has been a great attractor of capital in the last five years. I mean longer than that, but it's been a true acceleration in the last few years.

18:07

Cool.

18:19

And it's down to the stability, the rule of law, a very convenient and well thought out regulatory regime ourselves. I mean we're a single family office, but we got ourselves licensed and that regulation brings a lot of discipline to our process and we are now in a position to take on external capital. We have. Yeah, very little bit. It's not a mean business.

18:20

Just let's pause on that for one second. So if folks want to invest in the same way that SAO and family office invests, they can. They can talk to you.

18:50

They can. We're not marketing. We haven't marketed, we. And we have no plans to market at this point. We have an investable vehicle but nobody knows about it and we're not holding it up. But yet even now we're not actually marketing. I think it's something that we want to generate a much longer Track record before we hold it up there. But yeah, going back to Singapore, I think one of the best things that's happened here is I worked for a family office in 2002, 2003 and back then I was always on plane to go look for gps. Today because of the, because of GIC and because of what MAS and are doing, it's attracting not only capital but GPS to come here to, to source capital. So I can, I can travel a lot less and I can find really good quality GPS and investment opportunities without traveling too much. And it's not just GPS but availability of talent, the talent pool here. And I think what's also underappreciated is the whole ecosystem. Fund administrators, auditors, consultants who 20 years ago I would need to reach out to Europe or the US to find today have a presence here and as

19:01

you say, have also a kind of global viewpoint. We've been hearing if you want to fund green infrastructure now around the world, Singapore is always a stop on your tour.

20:31

Yes, it's important to the country. We're an island with very, very little natural resource. I mean, look at our, our energy makes right. We're over 90% natural gas powered. There's not enough space for solar, there's not enough coast for wind. There's no geothermal, very little. So nothing you can really tap. So we have problems that need solutions and one way of finding those solutions is for the, for the government, for the state to hold its capital out there, not just for commercial gain or financial gain, but as a scout in search of ideas. And I think that's a very powerful thing.

20:45

And just to close family offices and you have a long history with them, are always held up as the natural investors in impact themes in particular, because the families themselves may have those interests and they are the deciders of where the capital can go. How are you seeing not just the sow family, but family offices more broadly, stepping up now to the needs, as you say, for this kind of capital,

21:36

I think it's very helpful. Large collections of capital have the capacity impact investing, as I said in the beginning, is about funding stuff that people want but maybe are not so ready to fund. And you need large pools of capital to do that. And it has to be large pools of capital accruing to the field, which is families or rich individuals. You can't have an insurance company, for example, doing that because it may be a large pool of capital, but its beneficiaries are many. So I think families and ultra high net worth are ideal sources of funding for Impact. And I think you can make money doing this as well, because very often it's, it's not that you're funding a public good, it's because you're funding something that's risky, where maybe people, traditional capital can't see the endpoint. But we can take a longer term view.

22:10

Well, you're paying it forward. You borrowed from Norges, and now others will undoubtedly borrow from you and the pool will get bigger. So, Brian Goh, thank you for joining us. And we're going to be checking back in with you to see how it's all progressing. Really appreciate it.

23:04

Thank you.

23:22

That's going to do it for this Agents of Impact podcast. Big thanks to Brian Goh, to our producer, Isaac Silk, to the whole team at Impact Alpha, and to all of you Agents of Impact, with gratitude for all that you do.

23:24

Sam.

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