Impact Investing

Impact investing is the process of investing in people or organisations that solve social and economic issues affecting those in need. At the same time, unlike charities or NGOs, some of these organisations also look to generate financial profits. Impact investments, in addition to social benefits provide a potential financial return to the investor.

Impact investors are generally divided into “impact first” investors and “financial first” investors[1]. “Impact first” investors are driven by the aim to create change, and are willing to overlook financial gain in the process. “Financial first” investors expect returns on their investments while also working for social or environmental gain.

‘Financial First’ Investments

Vishal Mehta, co-founder and Managing Director of Lok Capital, a prominent Indian venture capital fund that invests in bottom-of-pyramid businesses stated that, in India, “Impact investors have primarily focused on investing in early stage companies that have a strong low income focus.[2]”

A Capital Logic study of 50 fund management firms and 120 funds found that financial services, renewable energy, affordable healthcare and housing were the areas to which a majority of funds were directed[3]. Financial first investors like mutual funds and corporate pension funds were found to invest in funds that focuses (sic) purely on financial returns’, and expect a return of above 25% per annum.[4]

Vishal quoted the Unitus Capital India Impact Equity Investment Report 2013, saying that “over half of the impact investments last year have invested under $2 million, across seed to series A rounds.[5]”

The financial services sector sees the largest number of investments. Intellecap’s report on the impact investing space in India found that “over 50% of all impact investments have been in the microfinance sector, with the top 15 MFI (Micro Finance Institutions) accounting for 87% of all investments in the sector.[6]”This bias is understandable when one considers the professional background of the investors, the chance of generating profits, and the large market for these services. Tapping this market can mean a huge payoff for first movers.

Other unusual sectors receive attention as well. India has long been the world’s largest producer of milk, and a series C raise of around Rs80 crore in Milk Mantra Dairy Pvt Ltd drew eyeballs in June 2014. Aavishkar India Micro Venture Capital Fund, a reputed early-stage investment company focused on rural enterprises had earlier invested in this company, and this marked their exit.

‘Impact first’

Another category of investors chooses to aim for social impact ahead of financial returns. The Omidyar Network, for example, invests in for-profit and non-profit companies. In the past, they’ve supported organizations like Teach for India, Akshara Foundation, Association for Democratic Reforms and Janaagraha. Jayant Sinha, then partner and managing director of Omidyar Network Advisors India said that “Like a series A investor or an early-stage VC firm, our stake in for-profit companies varies between 10-15% and 25-40%. For non-profit, we will not support any organization for more than 25-33% of its funding. We want to make sure that there is a robust donor base supporting them.[7]”

Funders like Acumen believe in ‘patient capital’, “a debt or equity investment in an early-stage enterprise.[8]” This money is raised through charitable donations and other funding sources, and benefits enterprises with a social impact. Acumen believes in exiting in seven to ten years; so far they have invested $31 million in the Indian social sector. Their investees include Edubridge, Hippocampus Learning Centres and Labournet.

Conclusion

Impact investment seems poised to transform capital and put it to work for the benefit of society and investors. For those who believe in the transformative power of capitalism, the successes of impact investing provide a new way to engage with social change and perhaps get rewarded for it as well!