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Impact investments in India were $4.1 billion (Rs 27,800 crore) cumulatively over six years, up 15 per cent annually.
The term refers to investments made in companies, organisations and funds with the intention to generate social and environmental impact, alongside a financial return.
According to McKinsey, 60-80 million lives were touched last year across the financial inclusion, agriculture, health care and education sectors. In two-third of social enterprises, focused social impact funds have led the first investments.
In fact, impact investors played a critical "seeding" role, accounting for 60-70 per cent of investments in deals with ticket size less than $5 million (Rs 340 crore), says the report.
Private equity (PE) and venture capital (VC) funds have also been active participants, with 44 per cent of deals by value and 32 per cent by volume as sole investors in such projects. These investments have largely been in cleaner technology (77 per cent by value), followed by financial inclusion (14 per cent).
Dedicated impact investor funds have invested in 22 per cent of deals by value as sole investors. These have invested in a broader mix of sectors -- financial inclusion (51 per cent by value), clean tech (31 per cent), education, health care, agriculture (18 per cent).
Toshan Tamhane, senior partner, McKinsey & Company, said India was one of the world's biggest markets for impact investing, given the nation's many pressing social needs and an abundance of global capital.
Assuming growth of 20-24 per cent based on global rates and strong growth of underlying sectors, he estimated India's impact investing sector could absorb $6-8 billion (Rs 40,000-54,000 crore) of capital annually by 2025, if some barriers are addressed.
Vivek Pandit, senior partner at McKinsey, added with median returns at 10-12 per cent for nearly 50 exits analysed, top tercile deals delivered an enviable 34 per cent median internal rate of return. "Given the vast opportunity for social and financial dividends in India, impact investment is an asset class with enormous unlocked potential."
The research suggested some measures to expand such investing. Sectoral bodies and global organisations could collaborate with credit rating agencies to create and use standard social impact metrics. The government should consider allowing corporate social responsibility funds to flow to appropriate causes and enterprises, such as approved fund of funds for social enterprises, even those that generate profits. Government schemes could provide more support to socially relevant enterprises, such as job training.
Is also suggests creation of capital market platforms such as 'social stock exchanges'. Equity investors need to get more comfortable with 'pay for performance' structures (including earn-outs) that account for dual performance, common in the PE/VC space.