Impact investment hits $1.1 billion in India on back of maturing market

28 September 2017 5 min. read

Investment of equity into profit and socially focused enterprise in India topped $1.1 billion in 2016, according to a new report. Investors are becoming more confident as social enterprises mature, having witnessed a relatively healthy 10% median margin for exits between 2010 and 2015. Investment is, meanwhile, projected to grow considerably up to 2025, on the back of increased interest from philanthropists and social entrepreneurs.

In a new report from McKinsey & Company, titled ‘Impact investing: Purpose-driven finance finds its place in India’, the financial landscape of India has been shown as a test bed for impact investment, largely due to its emerging statutes, a large and diverse population, and extensive social and environmental needs. However, despite economic development, deep social divides remain, with around 22% of the population still living below the poverty line, and around 500 million lacking secondary educations skills and training. Due to the sheer size of India’s population, even a minority proves colossal, so while over 1.3 billion people presently live in the nation, 300 million live without access to electricity. This presents businesses with a host of expansion opportunities, with companies vying to invest in key services for a modest profit.

Profit as the only bottom line may take a back seat, however, as wider social and environmental issues become increasingly important to people, societies and entrepreneurs. One type of enterprise structure that aims to merge positive social and environmental outcomes and profit, is the social enterprise. By reinvesting profit into growth and social impact, impact investing by social enterprises seeks to address key social and economic issues.

Impact investment hit $1.1 billion

Impact investment into Indian projects has seen ups and downs in recent years, although Compound Annual Growth Revenue (CAGR) stood at 14% between 2010 and 2016. The last two years have seen the highest level of investment, at $1 billion and $1.1 billion respectively.

In total, $5.2 billion has been invested into 485 projects since 2010, with 2016 noted as the year with the highest average invested amount, at $17.6 million – up from $14.3 million the previous year. The investment type has, according to the firm, been boosted by the activity of a variety of investors, some more out to create impact while others seeking to diversify their portfolios into more social and environmentally friendly project types.

Volume of investment

In terms of deals by volume, interest has shifted in recent years, largely away from financial inclusion projects to a more diverse offering, including increases in education projects, agriculture projects and healthcare related projects.

Investment in clean energy saw declines, following delays in tax incentives for deployment – although investment is projected to increase since their introduction. While the value of projects across the various sectors more generally has increased, in part from increased business maturity in the various segments, the proven track record for profitable social enterprises; and sector experience and cross investment sector engagement with projects.

Impact investment returns

The median investment return on 48 equity exits between 2010 and 2015 shows a median investment return of 10% on an average investment of $2.1 million. Large differences were noted between top and bottom terciles, with the lowest performers generating returns of between -48% and 2% on their investments, while top tercile projects were able to generate returns of between 18% and 153%. Overall, the top third of deals was able to garner returns of 34%.

Renewable returns

Investment returns from social enterprises tend to favour renewable energy and financial services organisations, although this reflects their relative maturity in part. Holding period was relatively uncorrelated with eventual returns on exit.

India has gone through considerable changes over the past two years. The country’s emissions profile has improved significantly following the cancellation of coal plants not currently under construction. The change of direction has significantly lowered the country’s projected output by 2030. The country now almost scores medium on the CAT, while falling below the min 2020 pledge.

Growth of social enterprise investment

The relative size of India in terms of population, coupled with its fast-growing economy and focus on improved well-being, means that social enterprises will play a key part in the wider entrepreneurial ecosystem in the country. According to the consulting firm, social enterprise investment has the potential to see double digit growth, up from $1.1 billion last year to between $2.5-3 billion by 2020, which, coupled with 20-25% CAGR growth to 2025, could see impact investment hit between $6-8 billion.

Microfinance and clean energy lead the growth charge, followed closely by healthcare. Education takes a relative backseat at 7-9%. The new mindset of young people, with focus on risk, impact and returns, should see considerable funds made available to social enterprises across India, and the globe.