‘$5.8 bn in impact investing last year, 40% growth over 3 years’

[00:00:00] Hello and welcome to All Indians Matter. I am Ashraf Engineer. If you are not familiar with the term, Impact investing aims to achieve positive social or environmental results alongside financial returns. Most people don't know that impact funds usually

[00:00:13] earn a market rate of return which flies in the face of the belief that investing in social or environmental priorities is important but not very profitable. India is said to be one of the best markets for impact investors. So what is the impact investment landscape like in India?

[00:00:31] All Indians Matter. We have on the show Abhishek Gupta, Managing Director and CEO of Caspian Debt which has provided customized debt to more than 225 startups, social enterprises and financial institutions operating across sectors like food and agribusiness, clean technologies, healthcare, education, water, sanitation

[00:00:51] and financial inclusion. Abhishek is also an investment committee member at Dwarah Holdings, earlier known as the IFMR Trust which is an investor in a number of financial inclusions focused on startups in India. Welcome Abhishek. Thank you Ashraf. It is a pleasure to be here

[00:01:06] and thanks for having me on your podcast. Abhishek, for the benefit of those who don't know, could you explain what impact investing is? Sure. So impact investing is a type of investing where in addition to the typical commercial investing where you look for

[00:01:22] financial returns, in case of impact investing you're also looking for some sort of you know social or environmental returns as well or in other words you're looking for some positive social and environmental impact. Now I remember or I heard you mention about

[00:01:44] the fact that impact investing actually does give market rate returns which is true but if you really look at the entire space of impact investing it's actually a spectrum. On the one end you have impact investors who prioritize the development impact over the

[00:02:04] commercial returns and on the other end you have the kind of investors that you spoke about who give the development impact returns alongside the financial returns. In other words they do not compromise on the financial returns for the social or environmental impact.

[00:02:25] Now from a market perspective that category of impact investors is in larger numbers and the funds allocated is larger but it is actually an entire spectrum of investment so I just

[00:02:38] thought I mentioned that. In a way, in my view it is like a specialization. So like you have tech specialized investor or you know infrastructure specialized investors and such other things. This is also a version of a specialization where a deep understanding of

[00:02:58] how these kind of businesses work is necessary to actually make investments and also consider the additional complication that you're not just looking at financial returns. You're also trying to make sure that there is some social and environmental returns

[00:03:14] that are also achievable. So that's broadly what impact investing is about. Yeah and thank you this is a very good point that it's a spectrum not just one thing. Could you give us a sense of how impact investing is growing in India? Do we have concrete numbers?

[00:03:28] So if you look at the so there's actually an interesting report or a study that the Indian Impact Investors Council released I think somewhere last year and they are the ones that do compile these reports from time to time so you know you could look that up but

[00:03:47] according to that report roughly around 6 billion US dollars was invested into companies that work towards creating positive social and environmental effects. So it was the number was 6 million about 5.8 billion last year and 6 billion the previous year.

[00:04:07] Similar numbers in terms of the number so that's the quantum but in terms of the number of companies supported I think we saw a kind of a 40% growth over a period of three years.

[00:04:20] So it is growing for sure. The other thing that has happened is if you look back in history several years ago say 15-20 years ago a lot of the impact investing was fairly small

[00:04:32] tickets in terms of the size of investments. What has happened in the last couple of years is that the size of larger scale investment say individual transactions of more than 10 million dollars those kind of transaction sizes have doubled. It's still not enough but there seems

[00:04:50] to be increasing trend of larger size investments in addition to the smaller ticket investments that was already there as far as impact investing is concerned. And what is driving this group?

[00:05:05] I have multiple factors so if you look at impact investing as an asset class per se what has happened is that you know if you look back in history pretty much all the impact investors essentially started off as an investor in microfinance. This is pretty much the trend

[00:05:21] globally not just in India. So what happened was that pretty much everybody made significant financial returns and you know by investing into microfinance. In addition to the financial returns there was obviously a positive impact because it improved access to finance for a

[00:05:38] section of population which the traditional financial services organizations were not really catering to. So that gave a positive kick I would say to the or a kind of a proof to investors in general that you can invest in social you can invest in businesses that benefit

[00:05:58] society and you can do that while making financial returns. So I think that's how it started. If you look at India that happened with India as well so there were there was a significant number of impact investors who actually got both social returns as well as tremendous

[00:06:13] financial returns by investing in this sector. You know even if you look at to you know the kind of investing impact investing that happens today a lot of the investment is still dedicated towards financial inclusion. Earlier it was microfinance now we see a lot of you know

[00:06:30] micro enterprise finance but given the success of you know investing into financial inclusion what a lot of impact investors are now realizing is that there could be or there is an opportunity beyond that as well you know things like sustainable food and angry

[00:06:48] climate technologies you know and so on. So one is the success of microfinance has helped the cause. The second is in the last 10 years or I would say you know 15-20 years overall the entrepreneurial culture in India has grown tremendously partly because of

[00:07:10] you know startup investing kind of taking off in general and partly because a lot of government initiatives as well. I mean earlier when for example I completed college and if you did not

[00:07:23] get a job people would really look down upon you and say that you know what is it you didn't get a job. These days you know if it's actually something very positive if you decide not

[00:07:34] to take up a job and start a business you know this was not there earlier so there's a cultural shift as well. Now what that means is that there are a larger number of entrepreneurs

[00:07:43] who are coming up and they are trying to solve problems. Now India's status as a lower middle income country with a large population of low-income underserved household also creates this opportunity for investors to claim positive impact because by making some products or services

[00:08:04] available to a segment of population who was otherwise unserved it kind of creates a positive you know social or environmental impact. So by design India as a market makes it easier for investors to see both financial returns as well as you know the social or environmental

[00:08:22] returns. The last thing is that you know what we talked about earlier it's a massive if you are able to figure out how to make some products or services accessible to the low-income masses it's a huge market. It's an incredibly huge market now from a commercial perspective

[00:08:42] a large market is one of the primary requirements if you look at how we see you know normal commercial VC investments work they say that they would invest in businesses that have a massive market and that's what is available in huge numbers in

[00:08:57] India by design. So the commercial from a commercial viewpoint as well it makes a lot of sense so if you combine all of these things so past success in microfinance, growing entrepreneurial culture, India status as a middle low middle income country

[00:09:13] and a huge population or a huge market all of these together actually make it you know a fast growth kind of an environment as far as India is concerned. Right and Abhishek while impact investment funds have been around are we finding a growing number of mainstream investors putting

[00:09:30] money into the early stages of sustainable businesses and first-round funding and does this mean that the distinction between them and impact investors is blurring? This is an interesting question and I think so yes we have seen you know I don't know whether to

[00:09:46] call them mainstream or I should probably call them commercial investors. We've seen a number of commercial investors investing in so-called impact businesses but I think it's an issue of they're doing it without having a specialization so you know unlike technology where you expect

[00:10:04] that an investor is going to be good only if you are specialized so that they can guide you in that area typically commercial investors don't really understand how these kind of businesses work so I'm not sure whether the investments are investors would be able to support

[00:10:19] the companies appropriately or whether the returns will be appropriate you know it's because they're investing in an area that they have no expertise in. Now when you say that the you know the difference between an impact investing fund or and a commercial fund is blurring

[00:10:36] you're kind of trying to indicate that more of commercial funds are doing the work of impact investors. I think that is less of a phenomenon I mean that is happening but that is less of a phenomenon I think unfortunately the reverse is more true which is impact

[00:10:53] investing funds are behaving more like commercial funds instead and what I mean when I say that is because it seems that the early success of microfinance and similar financial inclusion investments has led to a belief that you can make good returns and within a very short

[00:11:11] frame if you look back in history most of the impact investment funds had a much you know longer time frame as far as impact or as far as the returns were concerned but I think

[00:11:23] that has shrunk and they're kind of expecting returns more like the in the time frame that is more like the normal you know commercial equity investors. Now the second aspect is that

[00:11:38] the there was a lot of focus on impact related measurements or to actually figure out what is the benefit getting accrued to the you know the underserved household a low income household. I think while there is a lot of discussion around impact measurement because of the

[00:11:56] complexity of being able to really measure impact I think that aspect has also gone that aspect has also reduced over a period of time so impact investment funds are no longer focusing

[00:12:09] on all these softer aspects to the extent that a lot of the early players were initially focusing on. So in a way the blurring is unfortunately in the opposite direction more impact investing

[00:12:20] funds behaving you know similar to commercial funds and that is also because of the fact that total capital that is available globally most of it is intended for commercial purposes nobody you know that perception is still there that these are high risk businesses that you know

[00:12:36] we'll not get the returns that we want so we should not invest. So in order to deal with that perception issue impact investing funds are trying to kind of you know act more like normal commercial funds. Right and how do you draw the link Abhishek between

[00:12:51] the United Nations sustainable development goals which are better known as SDGs and the role of impact investing. So I think the SDGs talk about you know sustainable comprehensive development of people overall you know basically how do we build a better future

[00:13:08] and there are different ways of doing it and I think impact investing as a investing methodology because it takes into consideration the non-financial aspects as well it is something that accelerates our progress towards the SDGs. Now and I think it is key for

[00:13:27] us to make sure that capital is available the capital is available in such a way that it is mindful of the social and environmental impacts if it is not mindful we'll probably get financial

[00:13:38] return but we'll not be able to achieve the sustainable development goals that we want to achieve. I think that's where the link is that it enables or accelerates impact investing accelerates achievement of sustainable development goals. Now Abhishek one of the biggest issues in

[00:13:52] any business and especially social enterprise is the scale now what role does impact investment play there I'm asking this because there seems to be an impression at least in media reports that such investments come in at the early stages of a business but not later

[00:14:07] when scale is the priority. So I think it's see by design social enterprises shouldn't have an issue of scale and the reason why it is because the customer segment is the mass right

[00:14:18] so that's a huge market. The problem however is the margins in my opinion right so margins are typically lesser in a smaller scale and you know sustainable or good quality margins are only

[00:14:33] made at a much larger scale. I think that is the problem now what that means is that from a margin perspective a social enterprise will typically take a little longer than a normal commercial institution to achieve the right kind of margins. Now what that means is that an

[00:14:53] impact investor by design should have the patience to be with the company for a little longer their return expectations may be the same but the achievement of the returns probably has to be there will probably happen after a little bit of time. Now the role that

[00:15:10] impact investors can play there is by being a patient really patient investor but if you really look at how the impact investing you know and this is not not about criticizing impact investor unfortunately this is how you know the impact investors have tried to make

[00:15:26] things work within whatever limitations are existing so but if you look at how impact equity investing works it has adopted the same seven to ten year fund life cycle methodology that commercial VC investors use. Now that time frame may not be good enough so you know a

[00:15:44] sustainable food and agri company may take seven years to just get to a stage where they are you know even becoming profitable forget about getting margins. Now I think that tenor appetite has to be longer and invest impact investors can play a role there. The

[00:16:01] second thing is that typically the impact investors the people in the teams come with backgrounds who understand these kind of businesses better like any tech investor they would understand the tech aspect better. I think impact investors come with the understanding of what

[00:16:18] social political and human aspects may lead to slowing down on scale and that aspect of that knowledge enables companies to learn from them and help the business grow better. So I think those are the two broad ways that impact investors can help the process but it is true

[00:16:37] that significantly large amounts of capital is not available at the growth stage for impact businesses. I think it's largely a perception issue. What is your view of government initiatives in this space? Now we've had the Atal innovation mission launched in 2016 which provides

[00:16:52] technical and infrastructural support to startups creating positive social and environmental outcomes. There's a social stock exchange designed to bridge the gap between investors and social enterprises and then there's the Samridri fund launched by the Small Industries

[00:17:05] Development Bank of India better known as SIDBI which seeks to provide capital to financially viable social enterprises. What is your view of such government initiatives? I think if you really look at all the initiatives it is focused generally on

[00:17:22] entrepreneurship as in creating better entrepreneurial environment in the country which I think is by design good. I mean it has brought about the changes in the social acceptance of entrepreneurship as a career choice right so which is I think the biggest contribution of the

[00:17:41] government initiatives. The other initiatives that you talked about I would say they are early and that I mean frankly the kind of opportunity or the need of capital that is there is

[00:17:51] significantly larger so these are good initiatives but you know there needs to be a lot more to be done in partnership with the private sector. The government can't be the it can be a catalyst

[00:18:02] it can't be playing the role of the you know the center forward it has to get the private sector to come alongside it. So I think these initiatives are great and positive and very well needed but more is more is required. I would say the biggest contribution

[00:18:22] of the government as I think this is in the recent years the government has been openly talking about supporting you know talking positively about entrepreneurship as a career option I think that's the biggest contribution in a way. What would you say are the biggest

[00:18:38] challenges before impact investing in India and what are the solutions? I don't know about the solution but I think today the biggest challenge is lack of domestic capital. If you look at impact investing or impact investment funds significant majority of those funds actually come

[00:18:54] from foreign sources. There is very little domestic capital that is there that is available for impact investment funds. Now in all these years a lot of foreign capital came in as impact investment funds because they were differential interest you know the developed countries had a

[00:19:14] much lower interest rates and we had much higher interest rates and India was a stable government you know country from from the perspective of stable and low risk country so a lot of them invested into India but now things have changed. Interest rates in the

[00:19:29] developed countries have gone up and I think from the perspective of India at the end of the day for us as a country to develop there needs to be more dependence on domestic capital rather than

[00:19:42] foreign capital. I mean I'm not saying foreign capital should not be there it is needed for sure but we need more domestic capital to come up and we need more domestic investors to believe that impact investing is a good opportunity to invest in for the sake of the

[00:19:57] country and for the you know individual selves as well. What would you say to the perception that there's a higher risk involved in such investments compared to more traditional avenues like technology or finance for example exit options would be limited even in the

[00:20:13] medium term wouldn't it? So I mean you use the very I mean you use the correct word perception. So if you really look at impact investments and its riskiness if you were to

[00:20:28] ask me you know is it risky I would say yes it is risky from the perspective of lack of exit options which is true because there aren't too many funds investing in this space but is it

[00:20:43] risky from the perspective of being able to create viable businesses? The answer is no. Now I'll explain it in a different way so if you look at and I'm sorry about taking these names

[00:20:53] but you know the much celebrated tech startups of India say the likes of Ola, Flipkart, Paytm. How old are they? They are I mean 14-15 years each of them they've been there for a reasonably long time. They're still not viable businesses that's the truth right but they have

[00:21:10] been able to raise multiple rounds of capital. There is the end goal of all investments is to create a viable business that is for sure. Now if investors had the risk appetite to invest in

[00:21:21] companies like these without expecting viable business even for as long as 15 years I think you know social enterprise businesses are way safer. You know they turn profitable much sooner they build more sustainable businesses much sooner so from that perspective it is not risky. So

[00:21:43] if you really look at that I would say that the reason why the investments are risky is because of exit options and exit options don't exist because investors think that it is risky and risk is actually the lack of ability to build viable businesses which social enterprises or

[00:22:04] enterprises with this you know social or environmental mandate has proven that they are better capable of building viable businesses than the so-called you know tech businesses. I think that's where the perception should start changing. Yeah also I sometimes think that

[00:22:19] you know a lot of store is laid in valuation rather than understanding whether these businesses are going to turn viable faster. You took several names and by the way we are very

[00:22:30] happy to take names on this podcast so you don't need to feel sorry about that but the OLA's the paytm's of the world I mean we know what's happening with paytm now

[00:22:39] we know what happens when these businesses list also. So I mean sometimes I just think it's all about there's an undue focus on valuation rather than the value that the business creates within society. Abhishek just touching upon another national priority which is employment

[00:22:57] now it's one of the most serious problems that this country faces. Is there a role that impact investing can play here? So I for sure so I see in general investing into early stage enterprises enables us to create larger number of companies that can generate

[00:23:14] employment. So in general any type of investing or early stage investing that creates or supports startups or SMEs is I think good from the perspective of creating jobs but I think what is more important and I think this is where impact investing firms play an additional role

[00:23:32] is they also try to look at the quality of the jobs. So it's you know you could have a job in the sense that I mean a job without a social security without a certainty that you know if

[00:23:47] for example you fall sick you will get paid or not if that is in question that's not a job right that's some version of I don't know paid slavery or something of that sort.

[00:23:58] I think impact investors have a role to play in the sense that from a long-term perspective to basically make companies realize that from a long-term perspective it helps if you create employment opportunities which are better quality you know the basic needs are met

[00:24:13] you know there are things you know like you know paid days off or social security that are made available to the employees because if that doesn't happen the social structure unfortunately becomes a little bit of a you know unstable. So I think from that perspective

[00:24:31] impact investors should be playing a much more important role. Yeah not just the creation of the job but the creation of a quality job is essentially what you are saying. So Abhishek

[00:24:41] tell us about Caspian Debt and its work in India. So we so Caspian as a group has been there for about 20 years now. We started off as an impact investing equity fund were the first domestic micro domestic fund investing in microfinance back in the day but over the

[00:24:58] years Caspian as a group have set up multiple funds. I look after the dead business and this dead business was started in 2013 so we are 10 years old now little more than 10 years old now. Over the last 10 years we've funded about 200 and a little more than 250 companies

[00:25:14] across sectors like food and agriculture financial inclusion clean tech health care education. We've not only provided debt so and our value proposition is that if you are a professionally managed company looking to build a high growth business that creates positive social or

[00:25:29] environmental impact we will provide you the debt because you know while equity is slowly getting easier to access debt is still a problem and debt of the type where you know it doesn't require mortgage collateral because if you go to a traditional lender today and if you

[00:25:46] want a loan in a few crores you can't get the loan unless you have three year profitability track record and if you don't have a mortgage collateral to offer. We are able to make the loan without taking those into consideration because we have a different method of evaluating

[00:26:02] companies and we've actually proven over the last 10 years that it is low risk because our credit quality has been much better than even the traditional banks which is considered to be low risk. That's been our track record one of the things that we've done is we've actually brought

[00:26:17] capital from multiple so what we realized was if you want to drive capital into impact creating businesses you can't just do it using pure commercial capital you have to take commercial capital which is obviously the largest pot but blend it with soft capital semi-soft capital

[00:26:35] development oriented capital and then you know using that blended capital drive it into business so we've innovated a lot in terms of the type of products you know use different types of you know risk management methodologies to reduce the risk of our exposures when we make these

[00:26:58] loans because otherwise it's considered as a very high risk and nobody else wants to do this and we've figured out ways innovated ways in which we can reduce this perceived risk and we've kind of demonstrated that it works and I think that's what has

[00:27:12] attracted a lot more newer players into the segment as well. We are the first Indian NBFC to be a signatory to the partnership for carbon accounting financials. This is a global group of financial institutions that has committed to measuring financed emissions

[00:27:30] in their portfolio and I just saw that I think today or yesterday the RBI has actually come with a recommendation on how financial institutions should be working towards addressing you know climate risk and carbon emissions. So I think we are one of the pioneers front runners in that

[00:27:49] other than that we've also kind of committed so we have also committed that 30 percent of the funding that we do every year at least 30 percent has to be for two businesses that

[00:28:01] are either led by women or are benefiting women. Our team is such that about you know typically it's very difficult to find investment firms with a lot of women in them. If you look at

[00:28:15] our company we I think as of now about close to about 45 percent of the team is women the investments team is actually majority women and now considering all of this we've been recognized as a 2x flagship fund which is again a global recognition. I think there are about 10

[00:28:32] funds globally that have got this recognition and there are just about two debt funds or debt businesses that have got this recognition. We are one of them so I think overall it's not just about what kind I mean of course we fund companies that create positive impact but

[00:28:51] we also operate in a way that creates impact in the way we operate. So in that sense a kind of not just making investment for impact but doing it how we are doing it is also something that we

[00:29:04] like to differentiate in this way. So yeah so that's about us. Savitsekar here's a question I ask all my guests at the end of the show why do you do this work? That's an interesting so I think it's a big

[00:29:19] first of all it's a big opportunity which I think the generally people don't look at because I think it's complex. If you look at the investment world I think we've made things

[00:29:30] very simplistic by saying that you get x percent ROE or ROA it's very easy to decide success or failure. Now the real world actually doesn't work that way so you have to consider all the social and environmental implications of you know you generating the you know the financial

[00:29:50] return. I think it's complex and I think people don't want to spend the intellectual bandwidth to really bother about all these things because it makes things complex. To me personally I think spending that intellectual bandwidth is what makes it

[00:30:06] challenging and it is interesting for me from that perspective because I think again you know it's easy to talk about financial returns but it is not the solution to all problems. There are

[00:30:17] so many associated things that need to be dealt with so in a way it's challenging and given my back I mean by chance or whichever way it happened my academic background my professional experience has always been in this space of trying to figure out the social and environmental

[00:30:34] aspects of businesses. So I basically try to do this from a place of my own personal background and expertise so I think that's how it comes naturally to me. That's also a reason.

[00:30:47] Abhishek thanks so much for coming on the show. Thank you for having me on the show and it was a pleasure being on the show. If your listeners or if your podcasts want to know

[00:30:57] more about us you can visit caspiandet.in. Please feel free to reach out if you want to know more. Thank you so much.