Impact special: time for India to look inwards

Interest in impact investing in India is booming. The market, according to McKinsey & Company’s Impact investing: Purpose driven finance finds its place in India, attracted more than $5.2 billion from more than 50 active investors from 2010 to 2016, with last year’s investments alone reaching $1.1 billion. The average investment size also increased by 132 percent in the last seven years, from $7.6 million in 2010 to $17.6 million in 2016.

Bold regulatory reforms and a rural wage focus, which have ushered in strong inflows from foreign and domestic investors, mean India’s macroeconomic environment has changed for the better.

High demand for impact investments is likely to continue as a result of its large population, sectors like healthcare and energy under stress, and a government motivated to bridge social gaps and support policy changes, says Vivek Pandit, senior partner and global co-leader of McKinsey’s private equity practice. “Global investors can learn a lot from India’s experience as impact investing scales and comes of age in the country.”

By 2025 impact investing in India could grow to $8 billion a year, the report reveals.

Ravi Narasimham, investment director of Hyderabad-based Caspian Impact Investment Advisers, tells Private Equity International that while foreign investors are bullish on India’s impact story, domestic investors are still wary.

The firm, which is looking to raise $45 million for its third equity fund, Caspian SME Impact Fund, is aiming to garner commitments from Indian institutional investors. Its current LPs include USAID, Overseas Private Investment Corporation and Rabobank.

“The response hasn’t been great compared to foreign investors,” Narasimham says. “It’s not only in terms of the response time but also in understanding the impact market – we need to tell investors what impact means and educate them that impact investing does not mean sacrificing returns. It’s unfortunate that even Indian banks do not have the risk appetite to look at this market.”

McKinsey data show market rates of return are achievable through impact investing; 48 exits between 2010 and 2015 showed a median internal rate of return of about 10 percent, exceeding the expected average market rate of about 7 percent. Nearly 80 percent of the exits in the ‘financial inclusion’ sector were in the top two-thirds of IRR performance.

Narasimham adds the returns need to be seen against the backdrop of macro factors in the country, such as the microfinance repayment crisis in 2009-10, when the government had to shut the sector down, and a recent demonetisation exercise carried out by prime minister Narendra Modi’s administration. Caspian’s equity funds, 2005-vintage Bellwether Microfinance, a market development fund, and 2008-vintage India Financial Inclusion Fund, are showing a 10 percent and 18 percent internal rate of return in Indian rupees, respectively. The firm is aiming for a 25 percent IRR for Caspian SME Impact Fund