Impact Investing In India Could Grow To $6-8 Billion By 2025, Says McKinsey
New research from McKinsey suggests that impact investments in India have reached over $4.1 billion in cumulative investments over the past six years. The sector is growing at about 15 per cent annually. From the investments made, at least 60-80 million lives were touched last year across socially relevant sectors such as financial inclusion, agriculture, healthcare and education.
The research report was released at the Impact Investment Conclave, Prabhav 2016, in Delhi organised by India’s impact investing industry body, the Impact Investors Council (IIC).
Impact investors have played a vital role in seeding early stage enterprises – they account for over 60-70 per cent of capital in smaller investments with deal sizes less than $5 million.
Conventional private equity and venture capitalists have contributed over 44 per cent of the impact investment capital in India, while the rest comes from specialised impact investors.
Vivek Pandit, Senior Partner, McKinsey & Company said, “With median returns at 10-12 per cent for nearly 50 exits analysed, top tercile deals delivered an enviable 34 per cent median IRR. Given the vast opportunity for social and financial dividends in India, impact investment is an asset class with enormous unlocked potential.”
The investments by PEs and VCs largely focused on clean-tech (77 per cent by value), followed by financial inclusion (14 per cent by value).
On the other hand, dedicated impact investor funds have invested in 22 per cent of deals by value as sole investors. The funds have been invested in a much broader mix of sectors – financial inclusion (51 per cent by value), cleantech (31 per cent by value), education, healthcare, agriculture etc (18 per cent by value).
Toshan Tamhane, Senior Partner, McKinsey & Company, said, “India is one of the world’s biggest markets for impact investing, given the nation’s many pressing social needs and an abundance of global capital. Assuming a growth of 20-24 per cent based on global rates and strong growth of underlying sectors, we estimate that India’s Impact Investing sector could absorb $6-8 billion of capital annually by 2025, provided some critical barriers are addressed by the industry and the government.”
To reach the 6-8 times growth in impact investing in India, the industry and its stakeholders could focus on developing standard social impact metrics. They may have to collaborate with institutions, such as credit rating agencies, that measure other types of impact. The government may consider allowing corporate social responsibility funds to flow to appropriate causes and enterprises, such as approved fund of funds for social enterprises, even those that generate profits. New instruments such as social impact and development impact bonds can be created to help match capital demand with supply. In time, the industry could also create new capital market platforms such as ‘social stock exchanges’.
Equity investors need to get more comfortable with ‘pay for performance’ structures (including earn-outs) that account for dual performance, which are common in the PE/VC space.
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