'Impact investment funds to grow to $5t in 10 years'

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Govt a crucial partner, says Roland Cohen, chairman, G8 Impact Investing Committee and founder, Apax Partners

Impact investment has been growing at a rate of 24 per cent in India since 2007. Impact investing involves investing with implicit intention of generating positive social impact. India can hope to be a world leader here, says Roland Cohen, chairman of G8 Impact Investing Committee and founder of Apax Partners, in an interview to Ashwin J Punnen of FC. Excerpts:

How is impact investing relevant in the current inclusive growth we are talking about?

What you mean by inclusive growth? When growth takes place everybody benefits, that is the theory. If you want to have inclusive growth you have to work on those left behind and use them to support the growth. I see impact investing relevant because it works on constrains of the economic growth. It takes people who are otherwise not been contributing and make them contributes to the economy. And the other side of it is that they are benefiting from it. Impact investors invest in social enterprises, which work to create social and environmental change in the country. Impact investing involves investing with the implicit intention of generating positive social impact along with a return on capital. It ends the old dichotomy, which saw business as simply a way to make profit, while social progress was best achieved through charity or aid.

How you see the corpus of impact investment funds growing in the coming years globally?

Today across the world, there is probably the total fund size could be $20-30 billion taking everything into account. I would say that in next 10 years we would go to a $1 trillion. And following 10 years we would get to $5 trillion and that is because there is so much need for that.

You also talked about the invisible heart of market. Can you explain the concept?

When we measure risk and return you are with Adam Smith invisible hand of markets. And the theory is that everybody benefits when they stick to their self-interest. But Adam Smith was much proud of his other book, ‘The Theory of Moral Sentiments’ than he was of The Work of Nation. The Theory of Moral Sentiment is about empathy and how people act of empathy. When you bring impact, you bring empathy so like risk-return and impact at a social level and environmentally makes the difference. And you bring in, therefore, impact to guide the invisible hand of markets, risk and return metric changes. So, the people begin to do things not just because of their own interest, they do it for a greater interest.

How you measure impact of an investment while doing the due-diligence?

Some issues can’t be measured, so if you are improving life of somebody who is terminally ill, how will you measure it?

Many cases you measure statistically, what happened before and what happened after an investment. Or you can compare it or another group. It involves setting the correct metrics.

What role can regulators and government can do encourage impact investing?

The government is a crucial partner because it can create an ecosystem support these kind of investment. I think the government should do this as an important tool to create conducive environment for such investments and policy changes to maximise the impact on a social and economic level. In India the skills of gender that the government could do through social impact bonds and outcomes and other areas could be prevention of chronic illness like diabetes and education which is where India focussing so much effort, reducing drop-out rates from schools. For instance, do we know the drop-out rates from university is in India? In Israel, they discovered there is 50 per cent of university drop-out rate. If you could manage to keep a kid from a poorer background in university, by social impact bond is big contribution. Here in India the government is very supportive.

How is the performance of these venture funds so far?

Social impact bonds are giving a return of 5-6 per cent. There have been one or two not been paid back. One in the US didn’t back, it is a good thing because it proves the point that it is a government programme, it probably pay back after 20 years. Lots of money will come with an expected return of 5-10 per cent. It doesn’t go up or down with the stock market and it diversify the portfolio. Emerging markets impact investment funds have returned 9.1 per cent to investors versus 4.8 per cent for developed markets. Those focused on Africa have performed particularly well, returning 9.7 per cent. The holding period has been greater than 5 years for all exits in last four years.

How difficult or easy is the exits for these investments?

Exit here comes from the outcomes funds. We don’t have to sell the social impact bonds you get paid so the exit is built-in.



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