Impact investor money chasing very few investible companies in India
Wednesday, July 2, 2014
Venky Natarajan, Managing Partner at impact investment fund Lok Capital, speaks to BUSINESS TODAY about impact investing in India. Excerpts:
Q. How do you view the impact investment segment evolving in India?
A. Impact investing in India is fairly young and evolving quite rapidly. Most impact investing since 2005 has been in microfinance Institutions (MFIs). Over the past three years impact investors have been working on partnering with businesses which enhance access to high-quality education, health care, energy, water and sanitation. Investors have also been keen on generating employment and developing the agricultural supply chain. The industry today has a range of players active in India from development finance institutions, private-equity funds, venture capital funds, incubators and likewise. Most business opportunities are early stage in nature.
Q. As an investor what are the blips you anticipate in the space?
A. The key issue in the sector is the availability of quality companies. While there is supply of funding in the space, there is a lag in terms of demand from good companies. We find very few impact-creating and investible companies but at the same time there is a lot of investor money chasing them. This leads to high valuations, which further makes the sustainability of the business difficult – in terms of ability to raise more capital, bringing misaligned investors on board, etc. These fundamental issues, if not nipped in the bud, could lead to a bubble.
Q. Is microfinance coming back on investors’ radar? And what has led to this?
A. Yes. Despite an increase in the number of investors in the MFI sector, the interest is quite selective. Problem-causing practices such as excess lending are now behind the industry, thanks to strict adherence to self-imposed regulations. While this capped profitability, well-run MFIs have proved that one can make a sustainable return of 15 per cent or more in this space. The key reasons for investor interest have been favourable regulations, positive signals from the Reserve Bank of India towards the sector, diversification of mature MFIs – all pointing to an asset pool with lower risks.