Exploring the mysterious space of Impact Investing
Well, Congratulations mate! But what exactly is Impact Investing? Or gosh it sounds interesting but what do you exactly do in this industry? These were few of the messages pouring in from friends and family as I joined Acumen Fund as an Investment Associate, a philanthropic impact investment fund.
My motivation to join the Impact Investing field has been mentioned in my previous article. In this article I would like to provide a flavor of the Impact Investing industry, why I am optimistic about its future and my initial experience.
Impact Investing in the simplest sense is the blend of philanthropy and risk-adjusted financial returns. The basic premise is that rather than provide grants or donations to charities or NGO’s, you invest ‘patient capital’ in social enterprises which can generate environmental and social returns along with fair financial returns albeit lesser than conventional PE/VC’s. While few critics scoff and dismiss the field saying that any investment can be denoted as ‘impact’ since it invariably generates employment and creates value for the society that is completely missing the point and in a sense belittling the industry. What differentiate impact investing are two crucial factors- first being the foremost intention to generate social and/ or environmental impact and second being a higher timeline of investment (8–10 years vs. 6–8 years). In that sense investing in social enterprises is trickier and tougher as they need to simultaneously manage double or even triple bottom lines at time. At the same time the conventional process of sourcing, diligence, presentation to Investment Committee and approval, structuring, post investment support and exit remain akin to any PE or VC in the industry.
At first glance you might be wondering that this sounds impressive but there is much more to it than meets the eye. For starters, the ingenuity of the entrepreneur, founding team and innovation in business model needs to be foremost since they are operating in some of the most neglected and complex sectors with several layers of governmental, ethical and legal issues to navigate and a lack of a support ecosystem in place. The fact that waste management, agriculture, clean energy, housing, education and healthcare still have some of the most critical and relevant problems to solve even after decades of technological innovation and progress exemplifies this issue. Only Microfinance has shown the potential and scale in terms of impact although its results have also differed widely across geographies.
The fact that Social entrepreneurship is a ‘tough job’ was a well understood idea to me having read up stories on social enterprises and their founder’s journey. However it is only when I started working with these enterprises on ground that their sheer tenacity, will power and struggle against innumerable odds each day hit as well as inspired me. To me they are the ‘unsung tireless warriors’ who keep waging a war against the status quo and hope to create hope for the ‘hopeless and down trodden’. And for each of the traditional challenges of a typical startup be it attracting the right talent and retention, finding the right investors to fund, networking with the right institutions and individuals to get strategic and operational support or simply tapping an ecosystem of like-minded entrepreneurs to share notes and challenges is sadly broken or missing. In fact such challenges are 10x amplified for them since they operate in a ‘non-glamorous’ sector with scant media or investor attention. However things are certainly changing for the better now and impact investing is gaining steam among businesses and investors.
Several reasons can explain this trend and why it is becoming mainstream. Firstly the market for global impact investing is projected to be $300 billion or more by 2025 and in India it is expected to grow to $6-$8 billion by the same time according to a recent Mckinsey report. Secondly it is proving to be an alternate asset class for mainstream financial institutions who look to diversify their returns and provide convenience to investors that their wealth is being used for a tangible purpose. The fact that legendary financial giants such as BlackRock, Bain Capital, Goldman Sachs and JP Morgan are setting up specific units focusing on impact investment points to this. Thirdly and perhaps the most important are the recent research studies which have dispelled the notion that impact investing can not generate the required target returns. The Mckinsey study which assessed 48 exits between 2010 and 2015 found them to produce a median return of IRR 10% while the top one third deals yielded a median IRR of 34%, a commendable find. Complementing this is a Global Impact Investing Network (GIIN) study which reported 90% of impact investors to have met or exceeded expectations on their financial returns on investment. All these trends certainly signify that the industry is and will continue to attract capital and top notch talent to the field and that its ‘sun shine’ moment has arrived.
To shift gears and talk about my initial experience in the industry, the first 15 days at Acumen have been exciting as well as challenging. To add some context, I am working with a pure and natural honey producer to help revamp their strategy and enable them to pause and reassess how, to whom and in which areas they want to position their products. For another of our portfolio companies, an education startup which provides English and Life Skills learning to students I am looking for the right investors to raise further funds and help them to fuel their next phase of growth. Simultaneously I am also evaluating new social enterprises in the education and agriculture space to invest in which fit with Acumen’s mission of changing the way the world tackles poverty and creating hope in a world filled with cynicism and despair.
I am thrilled and excited in equal parts to be working in these areas amidst lots of uncertainty and change. At the same time there is the slight nervousness or fear on being able to successfully guide and navigate few of the portfolio companies through turbulent times, to help find the right investments and to have the courage to take tough decisions when necessary. All in all the journey has just begun and I am all buckled up for a fantastic ride!
