Impact investment in India topped USD1 billion for the first time in 2015 and, between 2010 and 2016, totalled more than USD5.2 billion as the market attracted more than 50 active impact funds, according to new research by McKinsey.
The new data also reveals that the average deal size has more than doubled (from USD7.6 million in 2010 to USD17.6 million in 2016) while the number of deals has remained stable (at between 60 and 80 a year over the period). Financial inclusion and clean energy projects remain the most attractive sectors for investment, respectively accounting for 43 per cent and 21 per cent of investments last year. The report also reveals a rise in ‘club deals’ in India, where mainstream private equity and venture capital firms are increasingly investing in partnership with impact investors. In 2010, club deals accounted for USD130 million of investment, rising to USD240 million in 2016. The report concludes that impact investing in India could grow to USD8 billion a year by 2025.
Vivek Pandit, a Senior Partner and global co-leader of McKinsey’s private equity practice, says: “Investors around the world are seeking opportunities in socially responsible and purpose-driven projects. India is an attractive market with a large population and several social measures under stress, a government motivated to bridge social gaps and supportive of policy changes, and underlying economic growth and stable financial markets. Global investors can learn a from India’s experience as impact investing scales and comes of age in the country.”
The research reveals that impact investments in India have demonstrated an ability to employ capital sustainably while also meeting the financial expectations for investors. McKinsey’s assessment of 48 exits between 2010 and 2015 shows that the investments produced a median internal rate of return (IRR) of about 10 per cent, while the top one-third of deals yielded a median IRR of 34 per cent, exceeding expectations of investors. The report also concludes that the average holding period at exit has been about five years, which is shorter than the approximately ten years that a traditional private equity fund would expect.
Toshan Tamhane, a Senior Partner at McKinsey, says: “Having grown by a mean annual growth rate of 14 per cent over the last six years and now touching the lives of up to 80 million people, India has proved to be a real success story for impact investing, even as it continues to grow.”
The report concludes by outlining several steps the impact investing industry and its stakeholders in India could take to fulfil its potential in the country, including in measurement mechanisms, attracting talent to the sector and expanding industry collaboration. Some of the specific recommendations put forward in the report include the fact that stakeholders could collaborate with third parties such as credit rating agencies and chartered accountants to measure, audit, and report social and environmental impact.
In addition. the industry could work with the government to leverage CSR funds for approved uses in the impact investment ecosystem, like funding pay-for-outcomes programs, could explore market-backed innovations, for example by broadening participation through instruments such as social or development impact bonds, with the support of specialised intermediaries.