Giving social impact enterprises the funds ballast

S Viswanatha Prasad had had a fairly long stint in the financial services and was the CEO of a micro-finance company when he decided to start an impact investment firm to initially focus on financial inclusion.

“We set up Caspian in 2004 to bring private capital into businesses that were working in the financial inclusion space,” says Prasad. Caspian’s first fund of ₹100 crore ($20 million), called Bellwether Fund, invested in six start-ups, made five Series A and one Series B investment. Since then, Caspian has raised one equity fund, a venture debt fund and is in the process of raising a third equity fund – its fourth fund overall – and is now looking at other social sectors for investment opportunities.

The first fund’s remit was to help micro-finance institutions scale, enable financial inclusion and push for geographical diversification. All the good financial inclusion programmes were then concentrated in the South, says Prasad, and Caspian wanted to take financial inclusion to other regions, especially the northern and eastern regions. The second fund, India Financial Inclusion Fund, of about ₹550 crore ($100 million), came up in 2008 and the idea was to invest in the success stories of the first fund, in companies such as Ujjivan, Equitas and Janalakshmi. Besides, says Prasad, the second fund invested in micro-housing finance companies and in affordable housing development, long before affordable housing became a buzzword.

“As a firm,” says Prasad, “we focus exclusively on impact. We wanted to bring our expertise and capital in areas where we feel there is a need, there is a gap and one can build businesses serving these clients. But profitably,” he said.

As financial inclusion as a sector slowly matured in the early part of this decade, Caspian began to see opportunities in other related sectors, particularly sustainable agriculture, clean energy, healthcare and education. But this was also the time that the Reserve Bank of India came up with the concept of small finance banks and granted licences to a handful of companies to set up these banks. Many of those that got the licences such as Equitas and Ujjivan were all companies in which Caspian, as also other impact investors, had put in money in their early stages.

“We said okay, we have declared victory. Can we try and replicate some of the lessons that we have learnt into a few more sectors,” says Prasad. There is not much of a value addition happening in agriculture, there was a lot of talk on clean energy but not enough capital backing entrepreneurs who were coming up with innovative solutions.

In 2013, Caspian diversified into setting up a ₹550-crore fund that will either provide venture or early-stage debt to the impact sectors. It has so far raised ₹375 crore through a non-banking finance company, Caspian Impact Investments, that will provide collateral-free loans of ₹2-10 crore at an average interest of 15 per cent. Most of the companies in the social sector are founded by first generation entrepreneurs who do not have any assets to back them up. Traditional lending institutions lend only against collateral, which the first generation entrepreneurs find difficult to provide.

Tailor-made loan

According to Prasad, most of the successful social enterprises find it difficult to get debt, which is why Caspian decided to float an NBFC to provide debt to these companies. The loan is tailor-made for the company and it can range from as short as 4-5 months to a few years, depending on the nature of the business. “We don’t lend to family-owned enterprises. They must have an external investor and it has to be well governed,” says Prasad. The NBFC is backed by some US-based family offices, Dutch investment institutions FMO and Triodos Bank, SIDBI, Bank of Baroda and Rabobank. According to Prasad, Caspian is putting together a ₹300-crore fourth fund – Caspian SME Impact Fund. It has raised ₹100 crore and hopes to raise the balance in 12-18 months.

This fund will invest equity in ventures in financial services, food and sustainable agriculture, and clean energy, coming in at a later stage than its two earlier equity funds.

Investment plan

In the new fund, according to Prasad, Caspian will invest in the post-Series A stage, which is when they find it difficult to raise capital. A lot of capital has come in at the seed stage and the ventures are able to raise funds at the Series A stage too. There are not many investors willing to invest ₹10-40 crore ($2-6 million). “Series B it is very hard to raise capital. That is the sweet spot that we want to play,” says Prasad. At this stage, the business model viability would have been established. Caspian shortly plans to start investing from the fourth fund.

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