NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, June 1, 2015

Making and selling portable toilets? Investors wrinkled their noses when Rajeev Kher, Managing Director of Pune-based Saraplast Pvt Ltd, first sought funds from them in 1999. Sixteen years later, the toilets have been such a success that he is spoilt for choice as he looks for a third round of funding. “My company has been profitable for a long time,” he says. “But I will never forget that when I started off, it was Aavishkar which came forward to support me.”

And what exactly is Aavishkar? Set up in 2001, it is the largest of India’s impact investment funds – firms which provide money for projects seeking to meet the critical needs of people. These are not philanthropic institutions, but expect profitable exits with healthy returns just the way private equity (PE) and venture capital (VC) funds do. “Ours is a very misunderstood space and we are trying to address that,” says Amit Bhatia, CEO of the recently formed regulatory body of such investors, the Impact Investor Council (IIC). “Many people still think social contribution can only be through charity. We want to break the myth. The IIC seeks to build an ecosystem where enterprises can do good, while earning profits too.”

No doubt there will be hurdles. Vineet Rai, CEO and Managing Director of Aavishkaar, recounts an effort to raise funds in Hong Kong in 2010. “Before I started speaking I was told that most fund managers from India made similar pitches, and unless I had a differentiated theme, I would not get any investment,” he says. “I completed my presentation. There was absolute silence. I was finally told my theme was so different that they could not invest in it either.”

SUCCESS STORIES

The short-sightedness of the Hong Kong managers is apparent from Aavishkar’s record – 13 profitable exits out of 19 from the 48 companies it backed in the last 12 years. (Of the remaining six, Rai readily admits, three were complete disasters, while three others lost money.) “Overall, we got about Rs 115 crore return from an investment of Rs 40 crore, which means a gross multiple of 2.9 times the invested capital,” he says. “All sales were to private equity investors and the rate of return varied from 25 to 30 per cent.”

Lok Capital, started in 2002, is a similar success story. It raised $22 million for its fund, Lok Fund I, which was invested in 10 companies. “We have exited seven successfully, one had to be written off in the wake of the crisis in microfinance in Andhra Pradesh and we are negotiating for one exit this year,” says Vishal Mehta, co-founder and Managing Director, Lok Capital. “We had an internal rate of return of 25 to 30 per cent and at the fund level we had a rupee return of 16 per cent.” Similarly, Caspian Impact Investment Advisor has so far exited seven of the investments made by its Bellwether Microfinance Fund set up in 2005. “Our internal rate of return on all our exits ranged between 15 and 24 per cent,” says Mona Kachhwaha, CFO, Caspian.

According to The India Impact Investment Story, a 2014 report by Intellecap, which advises social enterprises, there are currently 100-odd such companies in India, which have invested a total of $1.6 billion in around 220 social enterprise firms. Of those receiving investment, 75 per cent were in microfinance, with the rest in agriculture, education, health and sanitation. First-round funding was $487 million, and the rest follow-on. “There are at least 30 documented profitable exits among impact investors,” says Bhatia of IIC. “The industry is growing at 27 per cent a year and by 2020, is expected to be worth $6 billion funding around 1,000 social enterprises.”