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Farming, health new focus sectors for impact investors

Brookings India Study Notes Shift In Trends; But Measuring Work Of Enterprises Remains Challenge.

Jul 22, 2019, 11.53 AM IST
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According to the study, funders see appropriate capital across the risk/return spectrum and suitable exits options as the biggest challenges.
(This story originally appeared in on Jul 22, 2019)

Impact investments, a pathway to achieve the seemingly divergent goals of financial returns and social good, are moving towards agriculture and healthcare in the country, according to the latest report of research organisation Brookings India. It’s a marked shift in trends from two years ago. Until 2017, these sectors saw muted interest from impact funds, receiving smaller infusions.

Energy and microfinance, however, continue to command the attention of funders the world over, as per the Global Impact Investing Network (GIIN).

Brookings, which interviewed 25 impact investors and industry stakeholders for its study, notes that the positive trend in agriculture and healthcare represents a deviation from microfinance and energy in India. About 67% of the respondents were interested in agriculture and education, while about 58% were excited about opportunities in healthcare and financial services, excluding microfinance. The respondents were given multiple options. Affordable housing, energy, and employability and skilling are other sectors on investors’ radar.

Greater interest in health and farming signals bigger opportunities, considering that large sections of the country’s population are underserved in these segments.

“While the reasons for this shift are unclear, policy uncertainty around the microfinance sector after the 2010 Andhra Pradesh ordinance and high capital requirements of the energy sector were noted as enablers for this shift,” the Brookings report states. In 2010, Andhra Pradesh introduced stringent conditions for microfinance firms after alleged coercive collection methods of some companies drove many borrowers to end their life.

Impact investment is being viewed as a potential gamechanger to address some of the world’s most complex problems that governments alone cannot handle because of budgetary constraints. The promise of returns on each investment draws funders who want to do public good. In the Union Budget, the government proposed a social stock exchange under Sebi to list social enterprises and voluntary organisations so they can raise capital.

Venture capital (VC) firms, according to investors, are increasingly looking to back impact firms as they see decent returns on such bets. Ankur Capital, which has exhausted its first fund of ?50 crore, said 70% of portfolio companies had raised follow-on investments from VCs focused on strong financial returns instead of the social good metric.

Ritu Verma, co-founder and managing partner at Ankur Capital, sees this as a validation of startups trying to solve problems in priority sectors such as agriculture and healthcare. She is currently raising her second fund of Rs 350 crore with a plan to back over a dozen new startups.

But even as Indian impact investors prepare to allocate more capital to startups in priority sectors, there are some challenges. Brookings India research director Shamika Ravi, who is on the Economic Advisory Council to Prime Minister Narendra Modi, told TOI that investors must innovate and measure the impact startups were creating for further help from the government.

“It’s very important to measure the impact. Right now, the industry is standing fundamentally on the back of financial returns. They are not putting in as much effort to showcase what is the impact,” Ravi said. “In the long term, this sector has to grow in India, and it requires investment. There is a huge investment gap and the government is looking for nonbudgetary allocations to help sectors like health, agriculture, and education.”

Typically, impact investors back startups early in their journey with smaller cheques, largely for seed stage to Series A funding. According to the study, funders see appropriate capital across the risk/return spectrum and suitable exits options as the biggest challenges. This is in line with global trends. Finding good quality investment is a challenge for about 32% of global impact investment firms. In India, 25% of firms face this issue.


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