Impact investing has become an integral part of the market but the concept still seems vague to most. Additionally, the myth of low returns that plagues investing deters mainstream investors from charting this course.
As India becomes a proven base for impact ventures and investments, there is an urgent need to revel in this emerging asset class. Impact investing is similar to any investment, whether equity or debt, made by individuals or institutions in private companies. But the money for these private companies is directed towards a specific purpose, such as supporting positive social or environmental change, not just generating financial returns. The companies driving these changes intend to make profits for their shareholders, just like any commercially operated company, but not at the expense of the planet or people.
For example, a waste management company in Bangalore, which is providing end-to-end waste management services to corporates, apartment complexes, institutions, communities and other bulk producer organizations and institutions. It is an example of a company working towards keeping the environment clean with a responsible and sustainable waste management solution, and at the same time generate revenue through its services. Similar is the case with a Mumbai-based courier company that employs hearing impaired youth, and in the process not only creates employment opportunities for able-bodied individuals but also takes advantage of opportunities in the logistics industry to generate profits. . Impact investing is all about investing in companies that are making a difference at the grassroots level along with generating financial returns. The key is to bring about an alignment between the planet, people and profits.
Impact funds can generate returns between a debt and a venture capital (VC) fund because the risks are similar. To put things in perspective, a fixed deposit will yield lower returns because there is less associated risk than a venture capital fund which can generate higher returns due to the higher risk. Similarly, loans/loans given to companies will yield lower returns than VC funds but higher returns than fixed deposits. In recent years, returns from impact investing have grown well. An impact fund (equity) should aim for, or should aim for, returns between 15% and 25%.
SEBI is the principal regulator for the management of all investment funds. The rules for Impact Investment Fund are similar to VC investment funds, as both are registered and regulated by SEBI as Category I Alternative Investment Funds (AIFs), which refers to funds that invest in early stage enterprises or social enterprises. or SMEs or sectors which the government or regulators consider socially or economically desirable. In case of complaints also, investors or all concerned can approach SEBI for redressal. In an ideal world, impact investing is a subset of ESG investing. ESG cuts companies’ environmental, social and governance-related risks/opportunities, while impact investing can focus on social or environmental, or both.
The minimum ticket size required to invest in any AIF is 1 crore, except for an angel fund where the minimum ticket size is 25 lakhs. Investment decisions are made solely by the fund manager, in accordance with the terms set out by the investment management agreement between the investor and the fund manager. Investors play a non-discretionary role in determining where funds should be invested. Alternative funds are a highly liquid asset class and are usually active for 10 years. In the first five years, capital is called for investment, and exit is realized in the next five years.
Similar to venture funds, impact funds make distributions to their investors when the funds exit the underlying companies. The key to running a successful impact fund that generates substantial returns is to strike a balance between the impact and financial stability of the investee companies. Impact funds, alternative funds and VC funds are all high-risk investments because they invest in start-ups, making them ideal for high-risk investors. By impacting investments on an equal footing with other investments, investors can unlock the industry’s true potential to solve social and environmental challenges globally.
Arvind Agarwal is the co-founder and CEO of C4D Partners.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.