Sectors like microfinance institutions, financial inclusion and healthcare together received 82% of the investment. Photo: Mint
Mumbai: Impact investing firms, which invest to deliver social benefits alongside financial returns, have put $1.6 billion (around Rs.9,600 crore) into India since 2000, mostly in companies in sectors such as healthcare, micro-finance, and financial inclusion, according to Intellecap, a social advisory and investment banking services firm.
The number of foreign investors looking to invest in the social sector has increased, while domestic investors show a reluctance to contribute to impact investing funds, said Nisha Dutt, director, consulting and research at Intellecap, which released a report on the matter at the Sankalp Unconvention Summit 2014, Asia’s largest social enterprise platform, last week.
“There is a lot of capital that has started coming in and once the money is coming in it has to get deployed; it is the coming of age of this industry,” said Dutt. Sectors like microfinance institutions (MFIs), financial inclusion (non-MFI) and healthcare together received 82% of the investment. The microfinance sector got 54%, followed by financial inclusion and healthcare at 17% and 11% respectively.
Dutt said the bulk of the impact investments came from foreign investors. “Domestic limited partners (LPs) have just not woken up to impact investing yet, and we are trying to spread awareness. It is not a separate asset class, but an emerging asset class,” said Dutt. LPs are investors who put money into funds.
Still there are some funds that have managed to tap local LPs. Omnivore Capital, an Indian venture capital firm that invests in agricultural technology start-ups, is one such. Jinesh Shah, partner, Omnivore Capital Management Advisors Pvt. Ltd said the concept of impact investing is still new in India and investors are yet to understand that funds like theirs are commercial ventures too.
“The word ‘impact’ is over-abused; we are a commercial fund, which creates an impact. We make profit like any other venture capital fund but the outcome of our investment also creates an impact,” said Shah. Omnivore raised a fund of Rs.260 crore entirely from domestic investors and has made eight investments so far. Its first investments, in 2011, were in weather forecaster Skymet Weather Services, Rajkot-based farm equipment maker Khedut Agro Pvt. Ltd, Bangalore-based FrontalRain Technologies that offers Internet-based supply chain solutions for farm businesses and Guwahati-based Arohan Foods.
Unitus Group also raised domestic capital in January, securing Rs.20 crore from high net-worth individuals in India, including Mohandas Pai, former CFO and HR head of Infosys and Ranjan Pai, head, Manipal Education and Medical Group. “If it is domestic capital we get flexibility to structure it. But there just isn’t enough domestic capital,” said Dave Richards, managing partner, Seattle-based Unitus Seed Fund, part of the Unitus Group, a federation of enterprises aiming to reduce poverty through market-based solutions. The Unitus Seed Fund has made 10 investments in India since December 2012.
Apart from finding it difficult to raise domestic capital, such funds are also finding investment options hard to come by. The $1.6 billion invested since 2000 has been spread across roughly 220 enterprises, but 60% of the capital has gone to only 15 of them, said Dutt of Intellecap. “There is a lot of money chasing few enterprises. We need to break that. We need more scalable models. That is the big challenge.” One possible reason for the low numbers is that the Intellecap report studied only enterprises that have a for-profit model, and that identify themselves as social enterprises. The report did not study enterprises that do not think of themselves as “social”, or social enterprises that do not follow a for-profit model.
Vishal Mehta, co-founder, of Lok Advisory Services confirmed that most impact investments in India have gone into microfinance firms and other businesses linked to financial inclusion, that are capital intensive. Lok Capital, an impact fund, was launched at the end of 2000 with the support of a grant from the Rockefeller Foundation and has carried out 16 investments in total. The fund has exited four of the investments.
Successful exits are another problem faced by impact investing firms. Since 2000 the sector has seen only 15 premium exits, says the Intellecap report. Premium exits are those in which the funds manage to earn a premium over and above the expected IRR (internal rate of return) which ranges from 5% to 25% depending on the company. “There have been only 15 exits, say one a year,” said Intellecap’s Dutt. Here too, almost all exits have come from Aavishkaar, India’s oldest impact fund that has been investing since 2001, she said, adding: “Most of the funds are new; give it another five years and we will be seeing a lot of exits.”
Of the exits so far, 10 have been in sectors like MFIs such as Ujjivan, Janalakshmi, Equitas, BASIX and SKS Microfinance. The remaining have been in the sectors such as livelihoods (Rangasutra, Desert Artisans), clean energy (Servals) and agri-business (Shree Kamdhenu Electronics). Sectors like education, water and sanitation need a much higher gestation period to show scale and returns, said Dutt. In addition, these are sectors with a strong government presence, especially in the form of subsidies which makes it a challenge to develop commercially viable business models.
Aavishkaar has seen the largest number of exits across both MFI and non-MFI enterprises. Lok, Bellwether and MSDF are other investors who have made exits from MFIs. Aavishkaar is the only fund with non-MFI exits till date. Aavishkaar Venture Management is the country’s oldest and largest social venture capital firm which has deployed over $90 million in over 45 enterprises since 2001.
Vineet Rai, partner and managing director, Aavishkaar said that exits are a natural problem for all venture capital firms. “In our case, since we invest in early stage social enterprises we either exit or never exit. But at the same time you can get a return of 20%, 40% or even 100% from social enterprises,” he said. Aavishkaar started as a non-MFI fund, but expanded its portfolio to invest in education, healthcare and MFI. “The initial five years were very challenging and [we] could not easily raise money. But it becomes better as you build capabilities,” said Rai.
Editor’s note: This article was first published at LiveMint.com on April 14, 2014 with the title “Firms investing in social sector have deployed $1.6 bn in India since 2000.”