What exactly are impact funds? Who can participate in venture funding? The absence of clear answers to some of these questions has kept even top-notch Indian investors away from impact investing. Through this Q&A with Arun Gore, President & CEO of GrayGhost Ventures, OPEN tries to empower HNIs with information so that they gain the confidence to participate in these investment streams and create new wealth.
How is impact investing different from other venture investing?
The major difference is that the product or service offering should be applicable universally; that is, it should be affordable to almost all its population base and contribute to systemic change. preferably a simple technology that is easy to use. It doesn’t have to be cool, just practical.
In your experience, what is the usual profile of people who invest in such funds? Who should be investing?
Impact investing is still in a nascent stage and has been the domain of foundations, DFIs and HNIs, “early promoters” who have carried the space this far. As this space matures, more engagement by recognised global financial institutions is required for impact funds to gain credibility. Pension funds, financial institutions, wealth managers and the like should be investing in these funds.
Are these investments usually done by individuals in their personal capacity, or routed through investment vehicles? Why is one route preferred over the other?
HNIs seem to prefer to invest on an individual basis. In most investment vehicles where HnIs are involved, they have significant influence on investment decisions. How these investment vehicles are structured and managed by independent professional managers is very important to ensure an impartial and professional approach to investing.
What is the minimum threshold for investments in such funds and what is the usual timeframe for these investments?
I believe the minimum threshold should be north of US$1M, to afford a professional and efficient management that is appropriately incentivised. Investment in impact funds has to be patient capital, with a minimum ten-year timeframe.
What has been the performance of such funds in terms of returns? What is the benchmark expectation?
Very few such funds have had the time to demonstrate a successful generation of returns for the fund as a whole. There have, however, been a few instances of limited success, primarily in the MFI space. There have been significant secondary sales but very few typical exits through M&As or Ipos that could bring credibility to the market. I expect all impact funds to be able to return close to market returns, anywhere around 15 per cent net IRR or above.
How is impact evaluated? What weight is given to impact vs. returns by such funds? Or is it a combination range that’s desired?
The impact is evaluated on a micro level (individual investments) as well as a macro level (collectively of all investments) to get the true value of impact. The impact should be valued using the metrics derived from each individual investment with minimal assumptions to keep it as realistic as possible.
I believe maximum impact and returns are desired. neither is more important than the other. It is our philosophy that a company that is successful economically will have greater and sustained long-term social impact.There is no reason to sacrifice either performance or returns.
What kind of ventures does an impact fund invest in?
The idea is to focus on investments that address the under-served community; that have a capacity to scale and transcend borders. Scalability and replicability are two primary goals of our investments.
dLight, a leading solar lantern firm started in India to replace hazardous kerosene lanterns, has been successfully scaled across more than 20 countries. bKash, a Bangladesh initiative, will soon be the largest mobile financial service provider in the world and today serves over 20 million customers in less than four years of operation. mKopa is a Kenya-based operation that has now expanded its sophisticated pay-as-you-go model to Uganda and Tanzania.
Please share one or two memorable experiences in your journey as the chief of an impact investment fund.
Some of the most memorable experiences are with the people I work, especially our entrepreneurs with whom I have shared many trials and tribulations of running a start- up business in a developing world; of making tough decisions and hard choices when needed in the interests of our goal to develop successful enterprises.
The happiness and pride in the face of kids who have just acquired study lanterns from dLight. They guard it as a very prized possession, something so simple and ordinary for the rest of us.
What are the pros and cons of investing in a global fund vs. in an Indian fund?
Pros are that it makes for a balanced fund, to invest in globally, and the risk is distributed as well as mitigated to some extent. The market is dynamic and so are opportunities. You have the luxury of a peek into other regions without too much exposure. India is approaching saturation with home-grown funds and it’s hard to attract Lp money as it has demonstrated strong economic growth in the past two decades.
The cons to a global fund are not to extend too far, especially into regions where the fund manager has no expertise.
Can an individual in India invest in your fund? How? If not, what needs to be done to facilitate such investments?
Yes, anyone from anywhere can invest in our fund, including from India. The main fund is US-based, structured as a Delaware Lp. Investments can also be routed through feeder funds that will be set up on a case-by-case basis through countries that have tax treaties with India.
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