I recently moderated an impact investing panel called, “Market Return vs Muted Return: To each his own.” at the India Impact Investment Conclave in Delhi. While preparing for the event, my first thought was that the impact investing industry has been having the same debate for the last 10 years, with no agreement.
Why? Because we are asking the wrong question. Let’s ask a different question: If impact investing is not a singular asset class, why is it expected to have a singular risk-return profile?
Impact investing defined
Impact investing is an investing approach that combines positive social impact with investing. It spans the entire spectrum of asset classes, from the very high-risk, seed investments in unproven business models and markets to venture debt-to-growth equity in large companies delivering social impact and collateralized debt to these companies.
Each of my panelists at the India Impact Investment Conclave, including Adam Wolfensohn from Encourage Capital, Graham Macmillan from Ford Foundation and Samit Ghosh from Ujjivan Financial Services, agreed it was unfair to bucket impact investing in one asset class, when it truly spans across asset classes.
Our role as an impact-first investor
The Michael & Susan Dell Foundation is a philanthropic organization, but we are an impact-first investor. Interestingly, the ‘success’ of many of our portfolio companies has been established when they receive large funds from other investors which allows them to substantially scale up their operations, and these investors are an important complement to our investments. Many of our portfolio microfinance companies are today attracting investments of $50 million USD and more.
When we started to build our portfolio, in 2006, we made our first impact investment in Ujjivan Financial Services, a start-up microfinance institution (MFI) focusing on the urban low-income customer. This investment was part of a larger initiative to catalyze the urban microfinance sector in India which was almost non-existent at that time. Other funders and stakeholders considered it high risk.
But our experience in other markets and on-the-ground surveys in India convinced us that this was a risk worth taking. So, we went ahead and made seven investments in urban-focused MFI startups. Eventually, each of these companies attracted other investors and lenders.
We are now replicating this catalytic investment strategy to demonstrate scalability and sustainability in education and the skilling and employability of urban low income children and youth. Clearly, our asset class within impact investing veers towards muted returns given the high-risk, market-making investments we select (which are aligned with our programmatic goals). But we have been fortunate that we have had some good successes in our portfolio, and a few exits that match market returns.
However, at an aggregate level, when we add the costs of portfolio management and likely outcomes over the entire portfolio, we identify ourselves closer to muted returns rather than market returns on the spectrum of impact investing as a whole.
It takes all kinds of investors and asset classes to deliver positive social impact at large scale.
It takes all kinds of investors to deliver positive social impact at scale
Some of our investees now have loan portfolios of over $ 1 billion. This includes our early investments in Janalakshmi and Ujjivan. They would not have reached this scale without the support of other social, or mainstream, investors. These investors would typically like market returns on their investments. They do not have access to concessional sources of capital, or philanthropic capital. They often commit market returns to their Limited Partners (funders), and are arguably closer to the market returns end of the spectrum of impact investment. It takes all kinds of investors and asset classes to deliver positive social impact at large scale.
Which is why there is no reason to debate muted or market returns, when each investor must identify its own position on the spectrum of risk-return, based on their philosophy and sources of funds.
What is the opportunity?
In my remarks at the event, I urged the industry to end this debate, and instead move forward to defining different asset classes within impact investing.
Impact investing in India now has a ten-year history. In the last five years, the industry has booked impact investments of over $4 billion USD in over 500 investees, with almost 50 exits. The industry has enough data to start segregating different asset classes, and introduce a lot more transparency in the dialogue between investors and their funders (Limited Partners and General Partners) and define expectations on the risk-return-impact continuum.
Everyone on my panel agreed on one issue: it is unfair to bucket impact investing in one asset class, when it truly spans across asset classes. And the promise of impact investing in India to drive sustainable social change, and ‘doing good while doing well’, continues to remain attractive.