IMPACT INVESTING IN INDIA

Posted on | by Wishes and Blessings

Background of Impact Investing in India

India is a natural test-bed for impact investments, with high social need and strong capital markets. As one of the two fastest-growing large economies in the world, India’s GDP expanded at 7.9% in 2015–16, to $2.1 trillion. Poverty is on the retreat; as per the ‘World Poverty Clock’ the poverty ratio declined from 45% of the population in 1994 to 4%(2) in 2020. However, a large part of the population in India remains underserved: 500 million people lack secondary education or skills training, 300 million people lack electricity, and 120 million rural households are unbanked(1)

Impact investing can be a vehicle to fund, catalyse, and scale approaches that improve millions of lives. India is an opportunity-rich environment and is emerging as one of the most attractive markets for impact investing worldwide. High demand for investments is likely to continue as a result of a growing population, underlying economic growth, stable financial markets with a strong rule of law, combined with large unmet social needs(1)

As per the report ‘India Impact Investing Story’(3), Impact investments in India have grown at a 26% CAGR over the last decade (CY 2010-2019), from $323 million in 2010 to $2.7 billion in 2019. Thus, bringing in $10.8 billion cumulatively into 550+ enterprises. While this is a relatively small amount of capital, these impact investments have had an outsized effect on socio-economic development. This is due to the direct targeting of underserved customers and the high level of business and technology innovation that has been seeded and scaled by impact investors.

Impact investors have had a catalytic impact on India’s social venture ecosystem: for every $1 attracted by India’s social ventures, they’ve secured $2 from commercial investors. Early-stage impact investments also “de-risk” companies and drive later-stage commercial capital. Indeed, impact investors accounted for 43% of initial funding and only 22% in the later rounds(4)

Evolution of business models has helped move capital away from microfinance institutions (MFIs) to other sectors. Initially focused on microfinance and then broader financial inclusion, the contribution of other (non-financial services) sectors has steadily increased over the decade. Cumulatively, approximately half the total capital deployed ($5.3 billion) and two thirds of total deals occurred in real economy sectors. These deals were with lower average ticket size, and mostly in agriculture, healthcare, education, energy and technology for development. The contribution of MFIs has reduced from 64% in 2010 to 7% in 2019 while non-financial companies increased their share of total capital raised from 24% in 2010 to over 57% in 2019(3)

Impact investing has also found new ways to improve quality of service delivery to the poor while making it affordable with business models and technology-based innovation for serving the masses (3)

Despite the exponential growth in Indian impact investing in the past decade, $10.8 billion represents just a sliver of the capital needed to achieve the U.N.’s 2030 Sustainable Development Goals. To meet the goals, experts say India must invest $600 billion annually, with half going to SDG No. 5 (gender equality), SDG No. 8 (jobs and economic growth) and SDG No. 11 (sustainable cities)(4)

Impact Investments performance in India

Indian impact investing has impacted ~200 million people through improved service delivery across four key social sectors: financial services (FS), education, health, and agriculture; and further 300 million people through the strategic use of technology for development. Importantly, it has done this by driving business model and technology innovation focused on service delivery at the last mile in a financially sustainable and scalable manner needed for sustained impact(3)

The 2018 McKinsey report titled ‘A closer look at Impact Investing’(5) states that Impact investments in India have demonstrated how capital can be employed sustainably and how it can meet the financial expectations of investors. The report looked at 48 investor exits between 2010 and 2015 and found that they produced a median return of about 10%. The top one-third of deals yielded a median return of 34%, clearly indicating that it is possible to achieve profitable exits in social enterprises.

The report sorted the exiting deals by sector: agriculture, clean energy, education, microfinance firms and others that work to increase financial inclusion, and healthcare.

Nearly 80% of the exits in financial inclusion were in the top two-thirds of performance. Half the deals in clean energy and agriculture generated a similar financial performance, while those in healthcare and education have lagged. With a limited sample of only 17 exits outside financial inclusion, however, it is too early to be definitive about the performance of the other sectors.

A Breakthrough in Social Finance(6)

On 8th October, 2018, two wholesale funds, India Impact Fund of Funds (IIFF) and the India Education Outcomes Fund (IEOF), were launched during the fourth annual Impact Summit hosted by the Global Steering Group for Impact Investment (GSG) in New Delhi, to further the growth of impact capital in India.

The IEOF is a first-of-its-kind $1-billion fund that will use funding at scale from development finance institutions (DFIs), foundations, and other institutions to align with the government’s agenda of providing quality education with better learning outcomes. The IIFF will be a $1-billion pool of equity and debt funds to finance impact enterprises focused on social and environmental impact. The IIFF will align itself with India’s own social and environmental goals and the UN’s Sustainable Development Goals (SDGs).

Impact investing in India has grown to be a billion-dollar-a-year industry, with the potential to grow 20 to 25% a year as per the GSG. The sector is now focused on scaling new models of impact, which will call for unlocking additional sources of capital.

Road ahead for Impact Investing in India: Complementing Philanthropy

The 2017 McKinsey report titled ‘Impact Investing finds its place in India’(7) states that with a combination of high social needs coupled with robust market forces, impact investors in India can make a strong case for growth. As per the report, Impact investments have the potential to grow 20 to 25% a year between now and 2025, reaching $6 billion to $8 billion in deployment.

Impact investing in India has the potential to grow six to eight times by 2025(1). The growth drivers are mainly:

  1. 1. Large unmet social needs
  2. 2. Strong forecast growth of Indian Social Sectors
    1. a) 23-25% in Microfinance
    2. b) 24-26% in Clean Energy
    3. c) 22-24% in Healthcare
    4. d) 7-9% in Education
  3. 3. 29% historical global growth

Philanthropy has been the primary source for funding social investments for centuries. Yet, charitable giving is changing fast; the transfer of wealth to a younger generation that is far more engaged with social issues has contributed to these changes. Applying business and investment tools to social problems is becoming more popular. While investors in the past looked mainly at risk and reward, they are gradually moving to a mind-set that considers risk, reward, and impact as equally important. The total value of philanthropic donations in India are about eight times higher than impact investments made in 2015. It is clear that philanthropy and impact investments are twin engines playing a complementary and sometimes overlapping role to help solve social problems(1)

Along with social enterprises, India’s non-profits continue to play a key role in the delivery of social services at scale. New and innovative service models have the potential to scale quickly by tapping into the strong grassroots network of non-profits(1)

Enterprises funded by impact investors touch 60 million to 80 million lives today, and growing. Their reach is one measure of impact. Specific measures of social or environmental outcomes are critical to their success and important to their funders. Thus, there is an encouragement for greater transparency and rigour(1)

Strong secular growth and stable capital markets with the rule of law are two pillars that have attracted global investment to India since the country embarked on its path of liberalisation a quarter century ago. But even with these basics in place, the primary stakeholders, including government, regulators, and funds, will have to address several enablers to realise impact investment’s potential(1)

About the Author

Manik on Impact investment in India

Manik Bahl is a CFA® charterholder. He has 5+ years of work experience in the financial services industry. He is passionate about finance and has always wanted to help the society, thus he left his career in Investment Banking to pursue social work. He aspires to leverage these learnings to enter the Impact Investing sector. While at leisure, he could be seen spending time with his family, listening inquisitively to the stories his grandparents share.