Fund of goodwill

The aim was to lend a helping hand to entrepreneurs promoting financial inclusion in India. The year was 2004 and Rajiv Lall, Vishal Mehta and Venky Natarajan were trying to raise their first fund. They first approached high networth individuals (HNIs), but met with no luck. Back then, most HNIs were willing to put money in either charity or commercial investments but never mixed the two. The next best bet was multilateral banks, and in 2005-06 the trio’s Lok Capital managed to raise its first fund of $22 million for social enterprises.

The country had just four or five impact investors willing to fund social businesses — producing goods and services for underserved regions or the middle- to low-income population. With its first fund, Lok Capital had joined this unique league of investors.

Fast forward to 2015: More than 30 impact investors have cumulatively pumped $1.6 billion into more than 300 enterprises and funds across financial inclusion, agribusiness, healthcare, education and clean energy, according to the Impact Investors Council.

Do-gooders do profit

With high-profile professionals chucking lucrative jobs to start social enterprises and HNIs turning bullish on the sector, India has rapidly emerged as the nucleus of impact investments. Family businesses, foundations, venture capitalists and even private equity firms are making a beeline for social enterprises. “The overall ecosystem in India has developed well in the last decade. In terms of ideas, investment, action on ground, and even the low- and middle-income population (which require these services), the only comparable country would be China,” says Anurag Agrawal, CEO of Intellecap, a social advisory firm working in developing markets in Asia and Africa.

Lok Capital’s Mehta has observed a consistent growth in the number of social entrepreneurs as well as investors in the last decade. During the first phase, the early years of this century, it was all about discovering whether the phenomenon of social enterprises was real or not, he says. That included establishing an impact investment model. “We were figuring out if you could make a venture sustainable while doing good for society, and that was the phase of extending microcredit.”

Not surprisingly, over 50 per cent of all impact investments so far has been in the microfinance sector, with the top 15 MFIs accounting for 87 per cent of all investments in the sector.

“MFI is a cookie-cutter model. For investors, the MFI space is a low-hanging fruit because of the scale it offers. That makes it easy to replicate and grow,” says Pradeep P, chief investment officer and executive director of Aavishkaar Venture Management Services.

The second phase, explains Mehta, involved applying the microcredit model to basic services for low-income groups. That included low-cost education and healthcare, models for the agriculture sector and environment, and so on. “In this second phase, more entrepreneurs were willing to take risks and test the model (of social enterprises). I think we are still in that phase where it is unclear how many sectors will adopt this,” he adds.

Slowly spreading light

Acumen India Country Director Ajit Mahadevan agrees that while the initial slew of investments have been in the MFI space, there is now also a focus on sectors like healthcare and education. But the process has been slow.

Nityanand Agrawal, MD and CEO of Banyan Green Fuels knows it firsthand. When he started working on carbon credit origination in 2005, he was unable to raise any funds.

“Investors and people interested in cutting carbon emissions are very few. Barring the cement industry, which is mandated by the government to reduce carbon footprint, most people are not motivated to participate in the process. They don’t want to invest in supply chain for alternative fuels. So we need people who are looking at impact investment,” says Agrawal. He tried hard to convince banks and other commercial lending institutions.

“They need collaterals, hypothecation and so on. And most venture capital funds want to invest in telecom, IT, real estate, e-commerce and quick-to-grow businesses,” he adds. Not surprisingly, environment, sanitation, education and healthcare failed to grab attention.

Finally, in 2012, Agrawal managed to raise ₹1 crore with support from Intellecap Impact Investment Network (I3N), an angel network focusing on social enterprises. “We have procured equipment for crop residue processing to replace coal. We are supplying this biomass fuel to cement companies around Gulbarga (Kalaburagi) in Karnataka,” says the Banyan Fuels chief. The company is expanding capacity and has turned profitable, showing that social enterprises too can succeed if funded on time.

Patience pays dividend

On the flip side, however, social enterprises seem a little slow in giving exit opportunities to investors. According to an I3N report in 2014, so far there have been only 15 exits at a premium. Of these, 10 were in the MFI space while the rest involved livelihood, agri-business and clean energy. Individual investors, however, claim a different set of numbers. “We have made 19 exits, of which 13 have been profitable. The others have not been as good, but it has been a good learning,” says Aavishkaar’s Pradeep. The gross return at 2.9 times is fairly competitive, he adds.

Mehta says Lok Capital has made nearly 25 investments and seven exits so far. “I don’t think I would say that exits have been low compared to the private equity model in the last 10 years. It is a new space and requires more time.” As for profitability of exits, “in the financial inclusion space, these are fairly handsome profits,” he adds.

Acumen’s Mahadevan prefers not to look at profitable exits as the motive behind impact investment. “Our philosophy is to provide social entrepreneurs with patient capital. It takes time, and length (of investment) is very important,” he says.

His fund has invested in start-ups like solar energy company d.light and WaterHealth International (taking safe and affordable water solutions to the underserved). Both companies have become prominent players, with their models replicated in other countries.

“Unlike most funds, our investment aims not for the returns alone but the setting up of organisations that will eventually serve the poor in the six sectors we are in,” he says. Acumen’s focus areas are agriculture, education, energy, healthcare, housing and water.

Great Indian bazaar

A likely reason for fewer exits is the relative nascence of the sector, he says. “Our capital cycle is seven to 10 years and we are nearing an end of that cycle. Now we can exit in some years after these enterprises are stable.”

Pradeep points out that social enterprises have to get the execution and business model right as they mostly cater to remote or interior regions and a different category of clientele. “Once you get it right, then you keep scaling up. Finding the right button is important, and it may take time,” he says by way of explaining the slow growth of some social enterprises.

While the growth may have been slow, it is steady for sure. The National Association of Social Enterprises (NASE) was set up in April 2012 as a networking platform for policymakers, investors and academia. Under NASE, founders of social enterprises meet twice a month to share experiences and gain insights.

And that’s time well spent. After all, with 40 per cent of Indians in the low-income category, worth $450 billion in demand, it is a huge market, says Intellecap’s Agrawal. “People are also looking at alternative markets, and not everyone is going after the rich guy in Mumbai,” he adds.

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