Impact investing, which focuses on social as well as financial outcomes, is slowly gaining ground in India. With about a dozen domestic and international funds operating in this space, the segment has grown steadily over the past five years.
According to a recent study by the Planning Commission, investments by these funds have crossed Rs 1,200 crore.
“This area of investing does see a substantial in-flow of new ideas, but quality and scalable models that capital providers find attractive are limited,” the planning commission report said.
Given the small ticket sizes and limited opportunities, this is significant, say fund watchers. “Deal sizes in this segment tend to be smaller. The upper limit would be $5 million (around Rs 27 crore),” said an investment banker.
According to the banker, impact investors still function as early stage investors, often being the first institutional investors in the investee company.
|FUNDS INVOLVED IN IMPACT INVESTING
- |Bellwether (Caspian Advisors)
- BlueOrchard Group
- Creation Investments
- Dia Vikas Capital
- India Financial Inclusion Fund
- International Finance Corporation
- Lok Capital
- Michael and Susan Dell Foundation
- Omidyar Network
The Planning Commission lists 17 funds that operate in this sector. Prominent among these are Unitus, Lok Capital International Finance Corp, India Financial Inclusion Fund, Acumen and Michael and Susan Dell Foundation.
Investee companies say impact investors come with an understanding of target customers’ needs and are able to better appreciate the processes followed by the companies.
Nitin Agarwal, head strategy, Spandana Sphoorty Financial, an Andhra Pradesh-based microlender, said: “Our experience has been good. While the commercial (non-impact) investors have been equally sensitive to processes followed in the customer side and compliance, impact investors are able to give qualitative inputs in designing services and products from the view point of customers’ needs. They are also able to better appreciate the usefulness of processes.”
Spandana has flows from Lok Capital’s $22-million first fund floated in 2010. While the first operated primarily in microfinance and microlending, Lok has closed a second fund in January with a broader investment horizon, including low-cost health care and education.
This is the broader trend that, say experts, as impact investing is slowly growing out of the microfinance sector.
In the initial years, most of the impact investors concentrated on the sector.
The last couple of years have seen the funds moving to areas such as education, healthcare, water, energy, etc.
Andhra Pradesh legislation trouble for the microfinance sector partly contributed to the shift, say experts.
But, despite all these issues, the interest in impact investing is increasing. According to a recent report by JP Morgan, in the next 10 years, high net worth investors would allocate 10 per cent of their portfolio to such investments, while institutions would allocate around five per cent.
Since the concept is relatively new and the first investments are yet to bear fruit, impact investing is still difficult to sell as a proposition for funds.
The JP Morgan study found most professionals in this field saying “lack of a track record of successful investments” was the critical challenge for growth.
Also, the sector is still to make up its mind about the relationship between returns and social impact, especially on whether sacrificing one will improve the other. While some investors, especially family foundations and charities, are ready to settle for a lower IRR (internal rate of return), provided they achieve the desired impact, others are aiming at achieving commercial IRRs, with impact icing it. “Somewhere in between lies the holy grail,” said the banker.