25 Jul Social Investment. Oxymoron?

Renous consulting organized a webinar on June 13th, 2020 to understand Social Investment. Following Industry experts discussed the topic in detail-

• Sushma Kaushik, Partner, Aavishkar Capital
• Arvind Agarwal, Managing partner, C4D Partners
• Mangesh Dakhore, Head, Social & Environment Management, Tata Capital
• Bhavesh Hemani, COO, CBA Capital

Impact Investing, a term coined globally in 2005-2006, are investments in viable and sustainable businesses and business models, however, in sectors which normally are not the flavour of regular investors. Example: Financial inclusion, healthcare, education, agri-businesses, etc. A few years back, it was assumed that anything social has to be done either by the government, the citizen-sector or the NGOs. But companies like Aavishkar have demonstrated that sustainable business models are available for investors to invest in rural sectors, small business, and financial inclusion.

Aavishkar started in 2001, is an early-stage investor, which started identifying and funding enterprises in rural sectors, while others restricted themselves to large cities and metros. Aavishkar, as a group, has several businesses: for-profit business akin to venture capital, advisory, and debt arm. They do not invest in a nonprofit organization; however, they do partner with such organizations, like in the past they have done business with the largest mobile toilet manufacturer.

Private Equity (PE) considers aggressive business’ globally whereas social or impact investments covers sectors which might not get attention from large or global players. Over time the line is getting blurred, big PE players are raising impact funds in billions, whereas social investors are moving towards another avenue such as EdTech, Agri-Tech, Fin-Tech, etc. Impact investment can make money like any private equity fund, the only differentiating factor, for example, C4D Partners operate as a venture capital fund and expect the returns like a PE fund.

Tata group has contributed towards the development of key institutions at the national and global level. Tata Cleantech Capital is a joint venture between World Bank Group’s IFC and Tata Capital. They started at a stage when renewable energy or clean-tech was at a very initial stage. As a result, most of their portfolio has been renewable energy. Now it covers all areas where the focus is on environmental returns along with commercial returns like e-vehicles, energy efficiency, cleaning of rivers. They have done huge investments for Namami Gange, a huge program by the government. Cities have comprehensive sewage treatment schemes which are implemented by private parties and are directly paid by the government. However, there is a gap between the flow of capital from the government, they play a role of filling the gap. Namami Gange is an evolved project wherein, plenty of structuring on the PPP model has been done by IFC to ascertain the risk and liability. Tata group has a vast outreach in terms of the social sector because of its CSR activities like developing TIFR, cancer research, etc.

From government schools to high-end institutions, the education sector is an important sector for the country, which needs to grow continuously. The entry of mainstream investors and VCs have changed the game a little. In India, this sector is heavily regulated, the government has still got substantial ownership in this whole ecosystem. There is partnership emerging between the government and private players wherein the private players are bringing innovation at an unprecedented rate. CBA capital started in 2013, is a venture capital fund which has education along with livelihood skills as their investment criteria. Technology is an enabler and has played an important role in the past few years. This ecosystem is going to change drastically, in terms of both quality and the kind of returns, with private participants, private capital and the government coming together.

Government Regulations

In India, for the foreign investor, it is a cumbersome process to invest in debt. However, in countries like Philippines and Indonesia, it is easy to invest in the same because of the lower number of rules and regulations, which sometimes result in a loss for either party. India is much ahead in the framing of rules and regulations in terms of protecting local players, local economy or infrastructure.

Fundraising

Most of the investors are institutional investors, who recognize the impact returns equally in overall offering. HNI investors or other segments of investors are warming up to the idea of sectors which create social positive returns and also, generate commercial returns.

Social Impact Valuation

For every dollar put in a company by venture capital, there is a certain impact that has been created in terms of employment, creation of livelihood, etc. The second-order impact is created by the company themselves like sourcing directly from farmers, enabling supply chains, environmental impact, social impact. At the time of investment, both financial and social filters are applied by investing company

Apart from the financial plan and projection, investors also identify social impact matrix and align the same with, the company overall objective, and impact achievable. The social matrix is decided based on sector company is operating in, also the matrix is specific to the company. Both financial projection and impact matrix are audited on a timely basis: quarterly, annually.

Social Investment is quite in a nascent stage to have an evolved framework which would work for all sectors across the globe. More and more development financial institutions and many government agencies are working together to come up with the framework which would broadly work for each sector.

Though these businesses are bringing ESG impact: environment, social and governance. Still it is a challenge to monetize the social enterprise in terms of pricing because of the impact they have achieved. The follow-on investors who are your mainstream investors or PE investors tend to put the same financial filters when evaluating these businesses. In current times, the large PE firms have started looking at impact being created by these companies and billions of dollars are being raised.

Also, investors in such companies get carry interest that depends on the impact created. As an investor, the one impact matrix which is being followed is investing in women entrepreneurs and if they do not achieve the minimum threshold their percentage of carry interest as a fund manager starts decreasing.

At investee level, sometimes convertible instruments CCPS are issued, whose conversion depends on: the business plan achievement in the next few years and impact achievement.

In post-COVID world, the impact will be the new mainstream. Especially after looking at the problems India is facing with migrant labour and vulnerable communities are very badly affected by COVID. Digital transformation is happening at a much faster pace. We will see lot changes and technology-enabled business will be the focus.

Impact Bonds

There are few sectors with few problems that can be better solved through impact bonds like education, sanitation, etc. A lot of such initiatives will take place as there are multiple stakeholders involved: the government, private sector and third parties.

Miracle courier is last-mile delivery service, operating in Mumbai and Pune. It employs people with disability-deaf and dumb. With the expansion in Pune, a delivery centre was set up where women with disability were

also employed. Over time, now they have an equal mix of disable and able employees. Two challenges are faced in the valuation of such companies. First, it is not easy to value such companies. Second, it is not right to differentiate such companies as they will eventually have to compete with their competition companies.

If social impact companies are overvalued, the market will eventually correct the price. Also, it will become difficult for them to raise the next round of investment. If such companies are valued at a lower price, it is also harmful as it will mean a lot of value for promoters which will again harm future fundraising.

Sometimes social impact companies have to change their business model as the impact intended was made different or the process is made less social.

Entry into Social Impact Investment

Students who wish to enter this field should first try to understand the social impact then move towards investing. They may start with interning at different places, identifying causes close to their heart.