The Global Impact Investment Network(GINN), not-for-profit group that works to promote impact investments and has some 230 members, defines impact investments as investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education. (1)
According to the GINN, impact investment in India accounts for more than 12% of the global total. Impact investor backed social enterprises have improved the lives of 60 to 80 million (2)
Furthermore, a McKinsey(3) study shows that , impact investments in India have the potential to grow at a Compound Annual Growth (CAGR) of 20%–25% until 2025, resulting in an increasing in capital investment from $1 billion in 2017 to an anticipated $7 billion in 2025. This investment will impact on the lives of millions of people in the country and although it may not be a comprehensive solution for the country’s socio-economic challenges, which according the Yes Institute, this will impact on aspects of development as follows:
Financial Inclusion, reaching 36 to 40 million people. This includes investments in Non-Banking Finance Companies (NBFCs), microfinance institutions (MFIs), affordable housing finance companies and MFIs offering non-capital services such as agricultural and business development.
Education and skilling, reaching 10 to 15 million people. This includes investments in companies providing affordable schools, inclusive ed-tech solutions, and products offering STEM curricula.
Agriculture, reaching 10 to 15 million people. This includes investments in the sectors of food processing, integrated supply chains, agricultural inputs, logistics, fair-trade, and agricultural development in the least developed states.
Health, reaching 6 to 8 million people. This includes investments in primary affordable health care and diagnostics, high quality secondary hospitals, affordable m-health solutions and child health clinics.
Growth in impact investing from 2010 to 2017:
Source: McKinsey & Company
Despite initial fluctuations, the trend in impact investment in India seems to have settled after 2014, with 2015 and 2016 achieving investments of $1 billion and $1.1 billion, respectively. As per the graph above, the average investment size mirrored this upward trend reaching a total of $14.3 million in 2015 and $17.6 million in the following year.
Change in impact investment focus
Source: McKinsey&Company (https://bit.ly/2HP0VP9)
The maturation of India’s impact investment market has seen a change in the focus of investment sectors. According to consultancy.in, at the start of this decade, investments in clean energy (wind, solar, and small hydropower generation) dominated impact investing in India. This changed sharply in 2013 as fund flows into clean energy slowed. Large investments in scale institutions in financial inclusion have offset some of this decline. Overall, the sector mix has changed. Clean energy amounted to roughly 40 percent of the deal value in 2014–16, declining from 60 percent in 2011–13, because of an increase in both the volume and value contribution from microfinance as the sector matured.
In terms of volume growth, too, there is increasing diversification. Investments in sectors such as education, healthcare, and agriculture have all grown during this period. Financial inclusion and clean energy accounted for 64 percent of the deals in 2016, compared with 88 percent of the total in 2010. This shows investors are finding investable business models and enterprises in sectors that were previously considered unattractive from a scale or returns perspective.(4)
Impact investors are playing a big role in stimulating the growth of social enterprises. Impact funds were the first investors in 62 percent of all deals and in eight of the top ten microfinance institutions in India. This led to traction from conventional PE and VC funds, even as business models of underlying industries matured.
Conventional PE and VC funds too played a material role as they brought larger pools of capital, which accounted for about 70 percent of initial institutional funding by value. This is particularly important for capital-intensive and asset-heavy sectors like clean energy and microfinance. Overall, 48 percent of the capital in the industry was infused in deals by mainstream funds.
As club deals become more prevalent, they highlight the complementary role of both kinds of investor. Such deals are increasing: 32 percent of deals by value and 13 percent of deals by volume were done in partnership (Exhibit 4). As enterprises mature and impact investors remain involved, they are able to pull in funding from mainstream funds.
Equally important is the complementary role non-profit organizations play in providing capacity with highly effective boots-on-the-ground capabilities. Non-profits have typically been on the ground for longer periods and have developed cost-effective mechanisms for delivery and implementation. Impact investors could be seen as strategic investors in non-profits who in turn play roles in scaling up and attracting talent, and who can deliver financial and operating leverage in return. (5)