Impact investing finds its place in India

| Report

Rising demand for socially responsible and purpose-driven finance has resulted in new ways of putting capital to work the world over. In the past decade, what is now known as “impact investing” has challenged the long-held view that social returns should be funded by philanthropy and financial returns should be funded by mainstream investors.

The global market for impact investments is projected to grow to $300 billion or more by 2020,1 according to the Global Steering Group on Impact Investment. Although this is still a fraction of the total private-equity assets under management (about $2.5 trillion in 20162 ), mainstream investors have entered the arena and are bringing scale to what was earlier considered a niche. And the dialogue is shifting rapidly from impact investing to “investing for impact.”

India is fast becoming a test bed for many of these activities. Between 2010 and 2016, India attracted over 50 active impact investors, who poured in more than $5.2 billion. About $1.1 billion was invested in 2016 alone. This article, based on our new report, Impact investing: Purpose-driven finance finds its place in India, looks at recent developments in the country and debunks some myths that have long surrounded these investments.

At the frontiers of impact: The India story

Impact investing can be a vehicle to fund, catalyze, and scale approaches that improve millions of lives. India is emerging as an attractive market for this type of investing. High demand for investments is likely to continue as a result of the growing population, underlying economic growth, stable financial markets with a strong rule of law, and large unmet social needs.

Cumulative investment in impact investments in India since 2010 has been $5.2 billion. In many ways, 2015 was a turning point, as investments crossed $1 billion (Exhibit 1). Much of the growth has come from a doubling or more of average deal size, which rose to $17.6 million in 2016, from $7.6 million in 2010. The volume of deals has remained stable, at about 60 to 80 a year, demonstrating the emphasis on scaling new models of impact.


We observe four trends shaping impact funding in India:

Diversified and complementary sources of capital

Total investments have grown as a wider set of investors began to participate. Impact investors and conventional private-equity (PE) and venture-capital (VC) firms bring critical and complementary skills to the table. While impact investors funded 65 percent of total deals by volume (including coinvestment deals with traditional PE funds), these deals account for 52 percent of investments by value. Over the years, as business models in sectors such as financial inclusion and clean energy have scaled, investor confidence has grown and impact investors have started participating in larger deals along with traditional PE investors, resulting in more investment from club deals.3

Bigger ticket sizes

Data for the past three years show a spurt in deal size. Investments in clean energy dipped in 2012–13 as projects were deferred after a delay in implementing tax incentives for green energy companies; the industry regained momentum after new policies were implemented.4 Our analysis also shows three drivers of growth in average investment size. First, business models of several companies in healthcare, microfinance, and skills training have matured in recent years. This has increased their ability to absorb larger investments. Second, demonstrated profitable exits in the social sector are providing more liquidity to enterprises and improving their ability to raise capital. Third, impact investors who de-risk business models and build capabilities are beginning to collaborate with growth PE investors that specialize in scaling and capital efficiency, and this is supporting impact enterprises’ financing across their life cycle.

Would you like to learn more about our Private Equity & Principal Investors Practice?

More diverse sector spread

At the start of this decade, investments in clean energy (wind, solar, and small hydropower generation) dominated impact investing in India. This changed sharply in 2013 as fund flows into clean energy slowed. Large investments in scale institutions in financial inclusion have offset some of this decline. Overall, the sector mix has changed. Clean energy amounted to roughly 40 percent of the deal value in 2014–16, declining from 60 percent in 2011–13, because of an increase in both the volume and value contribution from microfinance as the sector matured.

In terms of volume growth, too, there is increasing diversification. Investments in sectors such as education, healthcare, and agriculture have all grown during this period. Financial inclusion and clean energy accounted for 64 percent of the deals in 2016, compared with 88 percent of the total in 2010. This shows investors are finding investable business models and enterprises in sectors that were previously considered unattractive from a scale or returns perspective.

Alignment of investment objectives

General partners (GPs) continue to hold themselves to a high standard on the type of investments they make and the stages at which they invest. Even as GPs see the capabilities and business models of social enterprises mature, especially in sectors like financial inclusion, they largely remain focused on earlier-stage investments. Limited partners (LPs) appear less constrained by the stage of investment or measurement metrics. Overall, as the industry matures and more exits and returns are realized, LPs and GPs appear more aligned on investment criteria than ever. For example, there is greater convergence on criteria necessary for social investment, adding to LPs’ confidence.

Dispelling myths about investing for impact

Impact investing still has a long way to go as investors continue to struggle with preconceived notions and biases. Our analysis has led to a few counterintuitive insights.

Myth 1: Impact investing means lower returns

Impact investments in India have demonstrated an ability to employ capital sustainably and to meet the financial expectations of investors. An assessment of 48 exits between 2010 and 2015 shows that the investments produced a median internal rate of return (IRR) of about 10 percent (Exhibit 2). And 58 percent of the deals either met or exceeded the average expected market rate of about 7 percent. It may come as a surprise that the top one-third of deals yielded a median IRR of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprises.


A sectoral analysis shows that financial inclusion stands out for profitable exits. Nearly 80 percent of the exits in financial inclusion were in the top two-thirds of IRR performance. Half the deals in clean energy and agriculture generated a similar financial performance, while those in healthcare and education have yet to catch up. With a limited sample set of only 17 exits outside financial inclusion, it is too early to evaluate the performance of the remaining sectors.

The correlation between size, volatility, and performance is evident (Exhibit 3), allowing investors to select the opportunities best suited to their skills and investment strategy. That volatility of returns decreases with increase in deal sizes is not to be taken for granted either. It’s an important outcome, an indicator that investors have expertise in seeding, growing, and scaling social enterprises and that they are able manage risk effectively.


Myth 2: Patient capital is a necessary prerequisite

Our analysis shows holding periods at exit have been about five years in both average and median terms. This is shorter than the approximately ten years that a typical investor with “patient” capital would expect. Deals yielded a wide range of IRR no matter the holding period. Viewed another way, this also implies that social enterprises with strong business models do not need long holding periods to generate value for shareholders.

Myth 3: Investing for impact is for impact investors only

Social investment calls for a wide set of investors if it aspires to maximize social welfare. Impact investors and conventional PE or VC funds play complementary roles. While both types of funds are active, impact investors usually back a greater number of smaller deals relative to PE and VC funds. Complementary skills by different players are useful at different stages of evolution of investee companies:

  • Stage one needs early-stage investors with expertise in developing and establishing a viable business model, basic operations, and capital discipline.
  • Stage two calls for skills in balancing economic returns with social impact, and the stamina to commit to and measure the dual bottom line.
  • Stage three requires expertise in scaling up, refining processes, developing talent, and systematic expansion.

Impact investors are playing a big role in stimulating the growth of social enterprises. Impact funds were the first investors in 62 percent of all deals and in eight of the top ten microfinance institutions in India. This led to traction from conventional PE and VC funds, even as business models of underlying industries matured.

Conventional PE and VC funds too played a material role as they brought larger pools of capital, which accounted for about 70 percent of initial institutional funding by value. This is particularly important for capital-intensive and asset-heavy sectors like clean energy and microfinance. Overall, 48 percent of the capital in the industry was infused in deals by mainstream funds.

As club deals become more prevalent, they highlight the complementary role of both kinds of investor. Such deals are increasing: 32 percent of deals by value and 13 percent of deals by volume were done in partnership (Exhibit 4). As enterprises mature and impact investors remain involved, they are able to pull in funding from mainstream funds.

Equally important is the complementary role nonprofit organizations play in providing capacity with highly effective boots-on-the-ground capabilities. Nonprofits have typically been on the ground for longer periods and have developed cost-effective mechanisms for delivery and implementation. Impact investors could be seen as strategic investors in nonprofits who in turn play roles in scaling up and attracting talent, and who can deliver financial and operating leverage in return.

Myth 4: Social enterprises backed by impact investors are small investments whose impact is a drop in the ocean

Impact investments generated a median gross IRR of 10 percent in dollar-adjusted terms. More significantly, they touched the lives of 60 million to 80 million people in India—about the size of the population of France. And as these social enterprises scale, so will their impact.

The road ahead for impact investing in India

With a combination of high social needs with robust market forces, impact investors in India can make a strong case for growth. We believe impact investments have the potential to grow 20 to 24 percent a year between now and 2025, reaching $6 billion to $8 billion in deployment.

How impact investing can reach the mainstream

How impact investing can reach the mainstream

However, to fulfill this potential, the impact-investment industry and enabling ecosystem need to take a number of steps. Several topics could be addressed:

Pursue transparency measures. The industry should identify clear and well-defined metrics for measurement. For example, it could standardize dual-performance metrics relevant to India at a sector level with local and global industry bodies. It could also collaborate with credible third parties such as credit-rating agencies and chartered accountants to measure, audit, and report impact.

Expand funding. Unlocking additional sources of strategic capital is essential. To do so, the industry could work with the Indian government to leverage corporate-social-responsibility (CSR) funds for approved uses in the impact-investing ecosystem. In addition, the industry could work with the government to create a “bottom of pyramid” fund of funds. Furthermore, the industry could create an outcomes fund backed by philanthropists, which would enable funding not just for social enterprises but also to multiple partnering nonprofits. Other approaches include exploring retail investing participation or guiding social enterprises on ways to strengthen credit scores.

Explore market-backed innovations. The industry could explore a wider set of market mechanisms for investing. For example, it could broaden participation through instruments such as social- or development-impact bonds, with the support of specialized intermediaries. It could also provide incentive for dual goals through pay-for-performance schemes for investors and philanthropists, and create new platforms in the long run, such as a social stock exchange.

Develop governance and reporting. The industry could develop higher and more transparent standards for diligence and reporting. It could also apply standards of diligence, investment, and portfolio monitoring used in traditional investing.

Attract and develop talent. The industry should harness the attractiveness of the social-environmental impact proposition to promote greater professional participation in funds and portfolio companies. The way forward might include introducing professional certification programs with a social-investment focus; supporting social-sector CEOs with incubation, coaching, and board-advisory services; and revisiting compensation and performance incentives to help bridge the gap with comparable alternative investment funds.

Strengthen industry collaboration. Associations could work toward increasing awareness of the industry through forums and seminars, inviting regulators, social enterprises, CSR bodies, and conventional PE and VC investors. The industry could develop case studies for successful social enterprises beyond microfinance as well as explore more strategic coinvestment approaches to increase participation of other pools of capital that bring complementary skills.

Download the full report on which this article is based, Impact investing: Purpose-driven finance finds its place in India (PDF–1063 KB).

Explore a career with us