Mumbai: The value of investments in India’s social enterprises has fallen by around 7% this year as investors struggle to identify companies that not only cater to the bottom of the pyramid by offering products and services at the right price points, but also provide sustainable returns for investors.
Excluding microfinance institutions (MFIs), the investor-backed six social enterprises have put in $21.6 million (around Rs112.5 crore) this year so far, compared with eight such investments worth $23.3 million in the same period a year ago, according to data from VCCEdge, which tracks venture capital (VC) and private equity (PE) activity in the country.
The investment tracker based its data on announced deals.
Social enterprises, which refer to both for-profit and not-for-profit companies that cater to people who live on less than $2 per day, facilitate inclusive growth. Hence, the fall in the number of deals is of concern.
Investors are cautious now, said Anuj Sharma, who manages investments for social investment fund Ennovent, adding that initially there was euphoria about this segment and a few quick investments took place. “People are now realizing that making quick deals was not the right approach. They are now taking time looking for the right kind of deals.” While there are a few good companies available, valuations are high, making investors reluctant to write cheques, Sharma said.
Investors, however, stress that their interest in these companies continues and more investments will be seen in the next six months as a bigger corpus has been raised and funds that were earlier focused on MFIs have now broadened their investment spectrum. Investors say there are huge investment opportunities in social enterprises. Moreover, the base of the economic pyramid in India representing the masses is a market in excess of $1.2 trillion, according to a study by the International Finance Corporation and World Resources Institute.
“There is neither increase nor decrease… It is just a normal cycle… Investors do not lose or gain interest, they are cautious,” said Vineet Rai, chief executive, Aavishkaar India.
Avishkaar India, which focuses on rural India, last month achieved a first close of $63 million for its new fund, Aavishkaar II, which has a target fund size is $120 million. The fund will invest in education and healthcare and expects to make the final close in six months. Its Aavishkaar Goodwell India Microfinance Development Co. is an $18 million fund, dedicated to MFIs, while Aavishkaar India Micro Venture Capital Fund is a $14 million capital pool for investments into micro and small enterprises that have a rural and social focus.
There are many investors putting money into the sector and this has made finding deals increasingly difficult, said Puneet Jhajharia, investment officer, Grassroots Business Fund.
“The impact on social investments is not a fall-out of what happened with MFIs,” he said. “There is no parallel between the two. Fall in MFI investments does not corroborate any disinterest in social businesses.”
Grassroots Business Fund is currently raising its second fund. Jhajharia declined to give details, saying he cannot speak about the fund it before the closure.
Investors said while the MFI crisis, sparked by stringent legislation in Andhra Pradesh, has not dampened their interest in social enterprises, corporate governance has become an issue of utmost importance. “High transparency levels need to be embedded in a company,” Sharma said.
While investors across VC and PE segments want more exits than have taken place so far, it’s not an issue bothering social investors as of now. “Not just the bottom of the pyramid companies, top of pyramid market has also seen few exits compared to other developed markets like the US,” said Surya Mantha, director, investments, Omidyar Network India Advisors. “India is an exciting market for us.”