Impact investing is something that has caught on in recent times where investors look at relatively less known enterprises in the private market space that work on technology to deliver better solutions to a wider class of people.
The conventional way to look at lucrative investment is to judge the potential of a company to grow and make profits in future. The well-established companies have a track record which attracts investors. But there is another big pie waiting to be explored in the area of impact investing. This is what Mahesh Joshi talks of in his rather interesting book called HIT Investing. The acronym stands for ‘high impact through technology’.
Impact investing is something that has caught on in recent times where investors look at relatively less known enterprises in the private market space that work on technology to deliver better solutions to a wider class of people. In particular, Joshi talks of investments in ventures that affect lives of people in the lower to mid-levels where the impact is significant.
The author talks in detail of eight such ventures which have made a difference to society at large. Hence the names of Quona, Apis Partners, AC Ventures, among others, are discussed in detail, covering their history and motivations. It should be realised that impact investing does get associated with making money and hence is not to be mistaken with donations.
In the process of providing funds to these companies, which can be financial services or energy efficiency or new technologies like decarbonization, a difference is seen in outcomes that benefit society.
Psychology of investing
In brief the book gets into the psychology of such investing which involves asking three basic questions. How are they doing it? What are the techniques used and what is the secret behind their success? The book hence focuses on the challenges faced, strategies used and finally the performance. This is done separately for all the eight investors.
In the process of this discourse, Joshi does some deep-dive analysis into four critical aspects of such investing. This can be a playbook that could be followed by anyone getting into this space. In a way, this can be the four imperatives that have to be looked at for successful investing.
The first one the author talks of is origination. This means finding companies to invest in. The well-known companies are well researched as information is available to everyone in an equitable manner. But once we move from say the public to private space, access is not available to all and the challenge is to get to know this canvas, requiring a lot of research.
Next, is assessing investment potential. This becomes a challenge as there would be limited publicly available data. Getting hold of it and doing the requisite due diligence would be the second sequential step to actually be in a position to decide whether or not to go ahead with investment.
The third step is to also assume the role in helping the investee company grow and achieve their objectives. Hence in a way it could be some kind of tacit management support to provide based on the investor’s experience in this field which can be drawn by stories in other countries.
The last is to carve out an exit route. It should be realised that the main return comes from exiting the venture once it is in a state where growth is sustainable. At times this can take time and could go on for at least 3-6 years.
Before ROI
Besides earning a return on investment, the funds need to be churned to other ventures, which would mean that the investor has to have a well-defined path to move out either through ensuring an IPO or any sale of shares. This is normally done after a critical mass of success is achieved or the main objectives are met in a well-defined time frame.
The author does, in a lighter manner, mention that the talk in this business is to have an exit plan even before investing.
Hence all the case studies analysed here clearly show how these four touchpoints have been achieved.
At the technical level he also outlines a possible template of the way in which portfolios are constructed by these investors, as evidently one should not put all eggs in one basket.
Therefore, diversification can be the key here. Also, he talks of how to assess the impact of these enterprises in terms of meeting their objectives which goes beyond just monetary returns.
The eight investors selected are fairly diverse in terms of their objectives and the stage at which they invest in the life cycle of the companies. Capria and Future Planet look at the early stage of operations, while Quona and AC ventures prefer slightly evolved ventures that have already developed a market and probably also started making a profit.
Apis and Lok Capital invest in enterprises that have already made profits or have a clear path for which capital is needed. SDCL, on the other side, which largely covers Europe and USA, focuses on ventures that drive energy efficiency.
More specific to India, Joshi talks of the success of microfinance and here he gives the example of Lok Capital which focuses largely on this sector. Lok Capital’s Fund 1 generated top quartile returns, while Fund II was in the top two decile for their respective vintages.
He argues that microfinance in our context is probably the best example of creating value in the lives of people and successful impact investing.
The author does stress the point that these impact investors are delivering market rate returns but the difference made to society is sharp. Data shows that there has been an increase in the institutions getting into this field. Also, these investors can be allocating between 5-25% of their funds as impact investment.
Logically, as more funds get allocated in this space, the returns for those who backed them early would also tend to increase. This book is quite unique as it looks at a totally different investment space which can really be inspiring. For those who would like to be associated with such investors, this book is a useful playbook.
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