McKinsey & Co. says impact investing in India has the potential to grow from $1 billion worth of investments in 2015 to $6-8 billion by 2025.
“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% 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,” said Toshan Tamhane, senior partner at the global consulting firm.
According to McKinsey, the Indian impact investment space has seen $4.1 billion worth of cumulative investments in the past six years. The pace of investment is growing at 15% annually, it said.
“At least 60-80 million lives were touched last year across socially relevant sectors such as financial inclusion, agriculture, healthcare and education,” the firm added.
In 67% of social enterprises, focused social impact funds led the first investments, demonstrating the vital importance of impact investors in helping socially relevant enterprises grow and prosper. Impact investors accounted for 60-70% of investments in deals with a ticket size less than $5 million.
On the other hand, dedicated impact investment funds have invested in 22% of deals by value as sole investors. The funds have been invested in a broader mix of sectors compared to the conventional private equity (PE) and venture capital (VC) funds, covering sectors such as financial inclusion, clean-tech, education, healthcare and agriculture.
Impact-focused investors active in India include the likes of Lok Capital, Caspian Investment Advisors, Unitus Seed Fund, Omidyar Network, Accion, Elevar Equity, Intellegrow and Omnivore Partners.
Conventional PE and VC funds have also been actively participating in the impact investment space. These funds contributed to 44% of deals by value and 32% of deals by volume as sole investors.
Investments by PE/VC funds have largely been focused in clean-tech (77% by value), followed by financial inclusion (14% by value).
Impact investments have also generated strong returns for investors, noted McKinsey.
“With median returns at 10-12% for nearly 50 exits analysed, top tercile deals delivered an enviable 34% median IRR (internal rate of return). Given the vast opportunity for social and financial dividends in India, impact investment is an asset class with enormous unlocked potential,” said Vivek Pandit, senior partner, McKinsey & Co.
According to McKinsey, creating a market for new financial instruments such as social impact and development impact bonds, allowing corporate social responsibility funds to flow to approved fund of funds for social enterprises, developing venture debt and crowd-funding platforms are some of the measures that can expand the impact investment space. Better governance and talent are also required to help the sector grow, it noted.
“The sector needs to apply the same standards of diligence, post-diligence and portfolio monitoring as in traditional investing. This will require talent,” it said. “The industry could benefit from professional certification programmes, especially on the social side, and targeted support for social sector CEOs such as incubation, coaching and board advisory services.”