Introduction: Impact investments, which aim to generate financial returns while creating measurable social and environmental benefits to address some of the world s most pressing challenges, have attained significant traction in India. J P Morgan estimates that global assets under management through impact investment strategies were ~ $50 billion in 2010, with projections of between $400 billion and $1 trillion and profit opportunity of between $183 billion and $667 billion over the next decade. 1 The Rockefeller Foundation reports that impact investing is set to grow at an annual pace of 30 percent. India is the second-largest market for impact investing after the US, with USD 500 million worth of investments made in 2012 alone. 2 However according to the Planning Commission of India, though many global and local funds have presence in the country, investments to the tune of only Rs 1,200 crore (around $260 million) have been made in India in the last five years. 3 Despite the discrepancy in terms of the total investment numbers reported, India is definitely one of the key markets in the impact investing landscape - given the enormous requirement, potential and opportunities across sectors, which requires market-based solutions to address many social situations. The literature on this topic and research on the Indian industry has, however, been quite limited so far. Research on Impact investments & scope of the study: Mainstream research publications on the Impact Investments industry have been either focused on discussing macro-level industry related information or debating on the sustainability of the industry. The current study focuses on the developmental phase for the impact investments industry, between 2010 and 2012. This time period was best suited for more detailed market study, especially for the emerging markets like India in relation to a. Understanding the characteristics of fund management firms and their investment strategy b. Role of the Limited Partners in supporting & developing the industry as well as understanding their region-wise contributions c. Market related factors & respondents perspectives influencing the growth of the industry d. Assessing social-environment returns and evaluating impact capacity of fund management firms e. Impact investment industry s contribution in supporting to achieve the Millennium Development Goals 1 J.P. Morgan Global Research; Impact Investments: An Emerging Asset Class; November 2010 2 Money Control, How impact investing could affect biz in India, March 2013 3 Ghosh.S, India has a long way to go in impact investments, Deccan Herald, March 2013 Page 1
Key findings from the study: The impact investments industry in India is spearheaded by the fund management firms, that manage the capital of a wide-range of limited partners (investors) and invest in various ventures targeting businesses addressing the bottom of the pyramid (BoP) segment mostly in Financial services, Renewable energy, Affordable Housing, Affordable Health, Rural supply chain, Technology services targeting the BoP space and Affordable Education sectors. ~ 50 fund management firms participated in the online survey - designed exclusively for this study adopting quantitative method with an inferential approach; aimed to set a benchmark for further in-depth studies in the impact investing space. The results discussed below are to be regarded as indicative, as it only represents a sample of the total population. The total population (~120 investment funds) includes the list of Impact first / Financial first / Hybrid investment funds which have closed an investment deal / intend to invest in India targeting the BoP space. The following points summarize the key findings of the study: a. Characteristics of fund management firms and their investment strategy Majority of the respondents are global funds led by hybrid investors, followed by Impact First investors. Majority of the key partners of global funds are either based out of North America or Europe. India focused funds are fairly new in the market - which are currently investing from their first fund. Most of the respondents look at a mix of seed and early stage. The average deal size is ~ $2 million. The results clearly indicate the dominance of equity based investments as the most preferred security type of investments across the fund management community especially amongst the India focused funds. The results show disparity with regard to percentage of funds committed to the BoP sectors in India - few firms have invested a large proportion of their corpus from their existing fund and few other firms hardly have invested in these sectors. Most of the India focused funds are slightly more conservative in their investment approach targeting these sectors. It is interesting to note that all the key characteristics of fund management firms share a significant statistical association with the percentage of funds committed to the BoP sector. Most of the respondents are planning for substantial investments from their existing funds in various sectors targeting the BoP sectors. The geographic characteristics of the funds seem to play a significant role in deciding the future capital inflow in the impact investing space. Most of the key characteristics of the fund show a significant association with number of investment deals closed in the impact investments space. Page 2
Investments in renewable energy and microfinance sectors have dominated the impact investing landscape in India. Majority of the respondents take less than 6 months in closing an investment opportunity. The results indicate that most of the impact first investors expect nominal returns from their investments. The expected returns amongst the global and India focused funds do not have significant variation. It is observed that there is a significant association between geographic focus of a fund and the expected rate of return on their investments. Most of the experienced global fund management firms look for an exit between 3 and 5 years starting from the time of investment in their portfolio firms. The results indicate that few global funds have had successful exits from their portfolio firms in India. Most of the respondents prefer promoter/s buyback or secondary sale to another fund as their preferred exit route. b. Role of the Limited Partners in supporting and developing the industry as well as understanding their region-wise contributions One of the key findings from this study is that impact investing industry has garnered attention and investments from a diverse investor class including fund of funds, corporate pension funds, foundations & charities, high net-worth individuals / family offices, insurance companies & mutuals and NGOs & religious institutions. These investors have varied investment preferences, but in general most of them tend to focus more on renewable energy and microfinance sectors. This might be due to the existing demand in the market, scalability of business in these sectors and proven track performance of these industries. Fund of funds, corporate pension funds, high net -worth individuals / family offices and insurance companies & mutuals typically invest only in funds that focuses purely on financial returns where the expected returns are above 25% per annum. The findings reveal that some of these investors and institutions are trading-off slightly on their financial returns and are supporting for the growth of the impact investing industry. The tests indicate significant statistical association between the financial returns expected by the investors and expected financial returns of fund management firms and similar relationship is established between the investment portfolios of fund management firms and the sectors preferred by the investors. Most of the global funds have raised capital from the investors based out of Europe and America, majority of the India focused funds have primarily raised capital from European Page 3
investors. In the recent times, there are many Asians involved in philanthropic initiatives and from the results it is good to note that some of the India focused funds are supported by investors based out of Asia. c. Market related factors & respondents perspectives influencing the growth of the industry Almost all the respondents across various geographic regions with ranging experiences evaluate the macro-level factors closely ranging from the economic, social, technological, governance and legal framework in the country while screening an investment opportunity. Most of the respondents place a lot of emphasis on various factors ranging from the investment mandate, market opportunity for the particular product / service, background of promoter/s and business model social outcome from the investments to the cultural factors while evaluating an investment opportunity. Significant majority of the respondents have a positive outlook on the current trend of impact investing in India which is certainly a good indication for a growing industry. Some of the challenges in the current scenario relating to lack of tax incentives and unclear policy framework, scarce resource in terms of talent, lack of quantifiable and uniform social metrics as well as significant lack of interest from the commercial investors/ capital markets will certainly be overcome as the industry matures with right investments in proper systems and infrastructure. Despite the financial crisis which led to unstable financial conditions globally, it is good to note that the overall sentiment across the fund management community appears to be positive towards the growth prospects and investment climate for the impact investing industry in India. Most of the respondents are optimistic on the future investment climate and believe that the crisis might not have a significant impact on the investors interests - which are good indications for a growing and promising industry. The future investment trend looks very optimistic and most of the firms are positive on their fund raising plans in the next 12-18 months from the Limited partners. Most of the respondents believe that the robust success of microfinance industry led to a lot more investor interest in this industry and the MFI crisis will pave way for long-term and quality investors with a better understanding of attendant risks. The Indian MFIs has raised more than $100 Mil in the first six months of 2012, which is certainly an encouraging sign for the industry. Page 4
d. Assessing social-environment returns and evaluating impact capacity of fund management firms Majority of the respondents including the financial investors measure social-environment returns from their investments in the BoP space. Most of them apply internally developed framework designed exclusively by their funds for evaluating social-environment returns from their investments. The investment strategy of the firms measuring social environment returns from their investments is as dynamic as the financial investors, in addition placing significant emphasis on the investment mandate, higher social returns, extended exit time frame and moderate expected financial returns on their investments. Most of the respondents have broadly conceived the concept of creating meaningful impact and measuring impact metrics in a positive manner. Most of the firms believe in having a corporate statement of impact investing vision /intent and also are active members in impact or industry specific associations / networks. e. Impact investment industry s contribution in supporting to achieve Millennium Development Goals Most of the respondents believe that the impact investing industry supports the progress towards achieving MDGs. Majority of them believe that the social environment returns generated from their investment portfolio/s support one or multiple MDGs directly / indirectly at some level, which contributes for the overall achievement of the MDGs. At this juncture, there is not much of literature / research linking the impact investments industry and its contributions towards achieving the MDGs. However, there are some publications regarding the microfinance industry and its contribution towards MDGs. Although it might be too early to link impact investments industry and its contribution in supporting MDGs, some of the findings of this study could indeed be used as a base for further research and for developing a comprehensive model in the future. Recommendations to the stakeholders: The recommendations to various participants in the industry - that includes limited partners / investors, fund management firms, investee firms and the government / other institutions are addressed separately based on the results of the study. Page 5
Terminology Definitions Impact First Investors - Investors who seek to optimize social or environmental impact with a floor for financial returns Financial Investors - Investors who seek to optimize financial returns with a floor for social or environmental impact Hybrid Investors - Investors who combine the passion and aspiration of a social/environmental mission with the discipline, innovation and determination commonly associated with a for-profit business Page 6