Venky Natarajan, Managing Partner at impact investment fund Lok Capital, speaks to BUSINESS TODAY about impact investing in India. Excerpts:
Q. How do you view the impact investment segment evolving in India?
A. Impact investing in India is fairly young and evolving quite rapidly. Most impact investing since 2005 has been in microfinance Institutions (MFIs). Over the past three years impact investors have been working on partnering with businesses which enhance access to high-quality education, health care, energy, water and sanitation. Investors have also been keen on generating employment and developing the agricultural supply chain. The industry today has a range of players active in India from development finance institutions, private-equity funds, venture capital funds, incubators and likewise. Most business opportunities are early stage in nature.
Q. As an investor what are the blips you anticipate in the space?
A. The key issue in the sector is the availability of quality companies. While there is supply of funding in the space, there is a lag in terms of demand from good companies. We find very few impact-creating and investible companies but at the same time there is a lot of investor money chasing them. This leads to high valuations, which further makes the sustainability of the business difficult - in terms of ability to raise more capital, bringing misaligned investors on board, etc. These fundamental issues, if not nipped in the bud, could lead to a bubble.
Q. Is microfinance coming back on investors' radar? And what has led to this?
A. Yes. Despite an increase in the number of investors in the MFI sector, the interest is quite selective. Problem-causing practices such as excess lending are now behind the industry, thanks to strict adherence to self-imposed regulations. While this capped profitability, well-run MFIs have proved that one can make a sustainable return of 15 per cent or more in this space. The key reasons for investor interest have been favourable regulations, positive signals from the Reserve Bank of India towards the sector, diversification of mature MFIs - all pointing to an asset pool with lower risks.
Q. What sectors and models will attract maximum investor traction?
A. There is a lot of hidden opportunity in the agricultural supply chain space. It can play a huge role in improving the livelihoods of the farmers. Lok Capital is very excited about this sector. Energy is another sector where we see great potential in coming years, closely followed by health care. Social infrastructure or social services models such as health care, education, renewable energy that work directly with the end consumer create the most interest from the perspective of impact investment. There is a latent yet strong need for financing in these spaces and we see new models emerging.
Q. What are the challenges that the segment faces?
A. The biggest challenge that impact investment faces is that there is a lot of money chasing a smaller group of investible companies, leading to high valuations. Also, we expect brick and mortar businesses to witness slower growth when compared to other sectors. Besides, practical challenges abound when one has to work closely to combine impact with profitability. Impact ventures also need to work closely with the government to create meaningful impact. The public-private partnership model has better chances to succeed in sectors like health care and education given the universal nature of demand that private players cannot fully aspire to satisfy.