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February, 25, 2020
Impact is the new mainstream – Vineet Rai, Founder and Chairman, Aavishkaar Group writes for IDR Online
Mumbai, June 4, 2020: COVID-19 has brought an end to the ‘greed is good’ era. There will now be a new economic world order in which the only thing that will matter is an inclusive and sustainable world.
Impact is the new mainstream says Vineet Rai, Founder and Chairman, Aavishkaar Group as he writes for IDR Online
As the challenges of COVID-19 unravel and ravage humanity across the globe, one recurring discourse has been to use this disruption to reimagine the economic architecture. Is it possible to convert the pandemic into a launch pad for a more humane, inclusive, and sustainable world?
The idea of impact investing is one such powerful idea, conceived to challenge the hegemony of greed and the desire to maximise returns at all costs, by taming capital into a more humane, sustainable, and inclusive tool for change.
In my journey of two decades chasing this dream of making impact a real alternative to mainstream global capital pools, I have learnt that money is a complex subject. And because most global capital is regulated by government (but not controlled by it), I’ve also realised that it is nearly impossible to tame global capital’s natural instinct.
But the disruptions caused by COVID-19 give me hope that, despite these limitations, impact investing may have a major role to play over the next decade in reimagining a new world—a world with no hunger, no poverty, and no inequity.
Commercial capital is driven by greed
The global capital pool is roughly USD 300 trillion and its primary objective is to maximise returns within the boundaries of identified risks. Capital markets work on mandates, and so far, they have focused almost entirely on this single parameter—maximising returns.
Over time, there have been significant causes that have knocked on the doors of capital—from philanthropic asks to help the vulnerable and marginalised, to demands to balance the reward equation to avoid concentration of capital, to calls for stopping investment in extractive industries such as oil, mining, and fossil fuels. However, none of these appeals have influenced the mandate of capital in any significant manner.
“Some among the affluent try to make an impact through philanthropy, but the contribution pales against the destruction caused by the ‘greed is good’ approach.”
The disdain for these asks is not because of ignorance of the risks that arise from social inequity or climate change. It is because the leadership of capital markets probably believes that the giant machine of capital allocation has little to do with these asks. They believe that corporate social responsibility (CSR) and philanthropic activities is where these demands should be directed, since capital markets must focus on an unadulterated vision of return at all costs.
Not surprisingly, this leadership represents the privileged and powerful. While they accept in hushed tones the downsides of this approach for the poor and marginalised, they consider them as collateral damage to the holy quest for capital multiplication.
An equally important factor is that while the world of capital plans for long-term risk management, its incentives as a global collective are more aligned to quarter-on-quarter performance. Long-term-ism is a philosophy to pontificate, not to act. While those who are conscious among the affluent do try to make an impact using personal wealth through philanthropy, the contribution pales against the destruction being wheeled in by the mainstream ‘greed is good’ approach.
The idea of impact investing
Impact investing—an idea mooted at the turn of century in India and the USA—believes that one can do good to do well. The idea took some time to find a toehold in the world of capital—the early adopters and leaders were focused on demonstrating that making impact has powerful potential to deliver returns. One of the goals of impact investing was also to wean away large pools of commercial capital from its single minded pursuit on maximising return, and instead deploy it to build businesses that were inclusive, sustainable, and impactful, while delivering returns.
During its early days, the idea was seen as utopian, and marginalised as a fringe innovation, as an alternate to philanthropy, rather than a challenge to the hegemony of commercial capital and its bottom-line pursuit. This has changed over the last decade. Today, with USD 500 billion allocated to impact investment, some of the largest aggregators of capital are now committed to this idea and see it as an important tool of change.
As one of the early messengers, I have often wondered if commercial capital has simply co-opted the idea of impact investing to make sure it does not challenge the capital hegemony, by taking away the focus from its true potential. Because, while it has pushed people towards measuring the outcomes of their investment, it has not changed the key architecture of how capital is deployed.
Mainstreaming impact investing
Impact investing has the potential to disrupt the global economic order and threaten the established and deeply entrenched world order. And the best way to neutralise a great idea and to preserve the status quo, is to co-opt the idea and mainstream it. Impact investing as an idea is therefore being co-opted by the capital aggregators, so that in the guise of numbers and outcomes, its soul can be trampled.
“Today, the language of the impact investing is no different from the language of mainstream capital.”
The idea of ‘doing good to do well’ is being replaced by ‘doing good and doing well’, thereby separating the impact from the process of capital allocation. This allows for minor tweaks in the current economic architecture and lets us continue to do what the capital world has done for ages, and be seen as impactful and sustainable.
As we stand today, most people who entered impact investing believe that it allows you to have your cake and eat it too. That it is possible to change the world while satisfying your greed. By co-opting the word impact, the idea of change has been diluted and compromised. Today, the language of the impact investing is no different from the language of mainstream capital.
COVID-19 offers us hope that things will change
To say that COVID-19 is a pandemic and a health hazard is obvious. But it is also a virus that has democratised fear, as it ruthlessly impacts everyone, including the rich and the powerful. Ministers, bureaucrats, CEOs, fund managers on one side, and nation states with powerful armies and some of the highest per-capita incomes on the other, have all found themselves tamed by the onslaught of a virus weighing just a few micrograms.
With the wheels of economies coming to a grinding halt, the managers of capital have seen a decimation of wealth as never before. It has hit those who never thought that such risks could manifest themselves and result in such destruction for them. Moreover, they have no idea as to how deep, long, and damaging this could be going forward.
‘Greed is good’ is dead
The privileged minority that controls the USD 300 trillion capital pool, which has always looked at risk and return as a continuum, is faced with an undefined risk that destroys value. It is not about maximising returns anymore, but protecting value. Can they protect the USD 300 trillion from losing its value? For the first time, it is not a question of earning less returns on the capital but actually losing it, and therefore, the focus is on the return of capital than return on capital.
COVID-19 has demonstrated to the money managers that risks that seemed like theoretical constructs by scientists, or showed up as glaciers melting in Antarctica, or rising sea levels in Southeast Asia, can strike and paralyse the global economy. The pandemic has brought the unsustainability of the outside world inside the boardroom of the rich and powerful. There is fear now.
Resilience trumps return
If greed is dead, what then is the new world order? It is one where resilience trumps return, where survival and sustainability of capital far outweighs the return that capital can generate. Given this, the best-case scenario for anyone is ‘resilience with return’, since ‘return at all costs’ is not an option anymore. This requires asset managers to take a long-term view of their actions on the society, before they take a view on the immediate return.
This is exactly what impact investing offers. It encourages the world of capital to embrace sustainable investing for good returns. It seeks capital to be invested in a way that uplifts people and society, sustainably.
Impact is the new mainstream
Given COVID-19 and its fallouts, mainstream capital now has to mimic impact investing and look, feel, and act like it is making impact, rather than the other way round.
In the new economic world order, the only thing that will matter is an inclusive and sustainable world. And when that happens, capital, companies, and leaders will look to build businesses that further equity, inclusiveness, and sustainability as a core strategy and seek shareholder returns that draw from this.
This new world order will also bring about other fundamental changes
First, capital will have to face a much higher level of accountability and scrutiny on the idea of impact, inclusion, and sustainability, and it may not be enough for a business to just claim impact. The idea of preparing a balance sheet and developing an accounting standard that takes into account the impact on sustainability will be pursued with same vigour over the next decade, as were accounting standards in the last century.
Second, we will require significant technological interventions, because impact investing by nature takes place in remote and inaccessible regions, where one can only work through technology. Digital transformation in the space of impact will be one of the most far-reaching tectonic shifts that we will see in the near future.
“The quest for resilience will force the world of capital to replace the idea of greed with sustainability, inclusion, and impact.”
Globally, we will also see a shift in geopolitics—from the hegemony of one or two, to several blocks of power. And even though it has become a cliché now, I think oil is a passé, and we will see investments in greener energy. Climate, energy, environment, and sustainability—these will become buzzwords of the future. There will be new roles for technology, new models of sharing, and new sectors—health, water and sanitation, hygiene, and so on—will lead the way capital is deployed.
Overall, the quest for resilience will force the world of capital to replace the idea of greed with sustainability, inclusion, and impact.
Change will come because it is about self-preservation for the rich
The world has seven billion people but very few control capital. And while 99.9 percent of humanity may forget the trauma of the COVID-19 crisis few years down the line, the few who control global wealth—those with the money and influence—are unlikely to forget the impact of this pandemic.
The world will change not because people will remember the trauma caused by the migrants walking; it will change because the virus has permeated the fear right inside the boardrooms of the largest companies, and the family offices of the richest people. The changes will come as self-preservation for the rich becomes a priority, and global shifts only take place when the powerful are fearful.
To read the full article in IDR Online Click Here
Mainstreaming gender lens capital solutions for women-led SMEs-
24th February, Mumbai: Economic Times Online recently featured an article on ‘Mainstreaming Gender lens capital solutions for women-led SMEs’ which was authored by Trina Roy, Associate, Intellecap.
The article largely talks about how Gender Lens Investing (GLI) as an approach to promote social and/or economic empowerment of women, in addition to financial returns has gained traction in the past years.
In the article Trina talks about how India currently has more than 8 million women-led businesses that represent 13.76 % of all businesses in the country as estimated in the Sixth Economic Census. With improved education outcomes, targeted interventions by the government and private sector, and other socio-economic factors; women entrepreneurship has indeed witnessed a rise over the last couple of years. States such Tamil Nadu, Kerala, Andhra Pradesh, West Bengal and Maharashtra have the highest share of women entrepreneurs.
Applying a gender lens to budgetary allocations, the government as an impetus to promote women led entrepreneurship has taken certain steps. These have included measures such as expanding the Women SHG interest subvention programme to all districts, making one woman in every SHG eligible for a loan up to 1 lakh under the MUDRA Scheme, among others.
According to the author, while these are welcome moves by the government to ease the access to finance challenge – an acute challenge faced by women entrepreneurs, the time is right to initiate conversation about bigger reforms.
She opines that, Gender Lens Investing (GLI), an approach to promote social and/or economic empowerment of women, in addition to financial returns has gained traction in the past years. Adopting the GLI approach, investors seek to channel debt and equity to businesses that create positive gender outcomes through various strategies. Some of these include supporting women as entrepreneurs, investing in development of products and services benefiting women, and channeling capital in businesses having a high share of women employees and in their value chains.
For India to unlock the potential of women entrepreneurship, concerted strategies to catalyze GLI and develop effective financing products for MSMEs (Micro, Small and Medium Enterprises) in particular will be critical. In this article we explore how the GLI philosophy is applied to supporting women entrepreneurs, specifically in the SME sector.
Elaborating on it further, she says that supporting women led SMES through targeted demand driven financing approaches and products lies at the heart of transforming the capital access scenario for women entrepreneurs in India. Depending on the type of scale and sector of an enterprise, multiple approaches can be explored.
First, after assessing the sector and sub sector category of MSMEs, tailored financing products combined with capacity building support can be developed. Majority of women led enterprises being subsistence businesses do not typically attract capital from investors or banks. Many of these women-led SMEs in India operate in sectors such as textile and handicrafts, food processing, beauty and wellness and are overwhelmingly concentrated in the micro and small scale business segment. Their particular needs are significantly different from high growth businesses to which the traditional start up ecosystem caters or steady businesses to which banks provide capital support. Bearing in mind their business models and market needs, sector or cluster specific financing products that provide patient capital aligned to growth rates and pay back periods would be instrumental to spur growth.
Second, blended financing products combining different types of capital – debt, equity and grant can also support women-led SMEs in underserved geographies or in sectors with low profit margins. With flexible capital, blended financing products reduce capital costs and can be leveraged effectively to overcome the problem of low returns and high risks; concerns that often limit traditional private sector investments. As an investment structure mixing concessionary and for-profit capital, the Women Entrepreneurs Opportunity Facility (WEOF) is a remarkable example of an effective blended finance product deploying capital to a segment often overlooked by financial institutions and global investors.
Third, innovative structuring of gender financing through development impact bonds, guarantee bonds, soft loans can also be explored to meet the needs of women entrepreneurs in the MSME sector. These serve as effective mediums to bridge social goals and economic returns. Experiments with development impact bonds and outcome bonds are at its nascent stages and have been promising in areas like health and education in India presently.
How would the DIB work? Here she suggests that adapting similar structuring to create a gender focused impact bond would channel private capital toward women entrepreneurship and augment the Government of India’s efforts to promote it. DIBs bring together the public, private and philanthropic sectors and align their interests towards a common set of objectives. Commercial investors pump in capital in a DIB, and the DIB in turn on-lends growth capital at low interest rates to a target women-led SME segment. Over the agreed tenure period, women-led SME repay back the capital with the given interest to the DIB. An independent agency monitors the outcome in terms of scale achieved by the SMEs and on its basis, a donor(s) and/or the government makes a payment to the DIB. Commercial investors are paid back by the DIB using the capital repayment by SMEs and the outcome based payments from the donors or government.
Other experiments including guarantee fund, soft loans, and interest rate subventions are viable alternatives to consider as well. To bring about a paradigm shift, efforts to build capacity and ease capital access must work simultaneously. Serious efforts by both the government and private sector are necessary to steer and mainstream Gender Lens Investing for women entrepreneurs in India.
In her conclusion she says that going forward, building a strong evidence case for GLI will be an imperative first step. Supporting data-backed research to provide insight into the performance and potential of such SMEs is crucial. Additionally, mapping stakeholders like investors, incubators, experts, enterprises, to identify opportunities of collaboration will strengthen its case. The current measures targeted towards women in SMEs provides the initial boost and is a larger signal for other ecosystem players, specifically the private sector to come forward and build on this momentum.
Aavishkaar Group featured in Business Standard in an exclusive story as part of ‘Lunch with BS’ tilted’ Early mover advantage’
Saturday 22nd February , Mumbai: Aavishkaar Group was recently featured in Business Standard in a story tilted ‘ Early mover advantage’ when Vineet Rai Founder and Chairman in an exclusive interview with Anjuli Bharagava as part of ‘Lunch with BS’ spoke about how high risk appetite combined with strong survival instinct is the recipe for success.
The entire interview with Business Standard :
In the early 2000s, when the world was yet to wake up to the promise of impact investing, Vineet Rai was registering a firm with the princely sum of Rs.5,00O to raise funds to transform rural India. The following year, he borrowed a lakh from his wife and registered an advisory com¬pany to help new entrepreneurs. Around the same time, in the United States, Jacqueline Novogratz set up Acumen, first as a fund and which later became a non¬profit. A year later, UK businessman turned philanthropist Sir Ronald Cohen set up Bridges Fund Management that in due course crystalised into an impact investing company.
That makes Aavishkaar group chairman Rai a pioneer in the impact investing space in India arid one of the early entrants globally. We are meeting for a long pending Dinner with BS at The Table in Mumbai’s Colaba area. Without wasting time we order a SoBo salad that we intend to share. Rai opts for shrimp tacos and a diet coke and I order a roasted almond tortellini. The term “impact investing”, he explains, was coined many years later —at a meeting at Lake Como, Italy, in 2008 by 10 members of the impact community. Would he then qualify as the “father of Impact investing” in India like his mentor Basix’s Vijay Mahajan, who is ofetn called the father of micro-finance? He laughs off the suggestion, adding that would be too laudatory.
Rai was 29 when the idea that a blend of talent and high risk capital could trans¬form rural India gripped him. He present¬ed his idea before the board of the Gujarat government non-profit he was CEO of only to be told that venture capital was barely available in Indian cities, let alone raising such capital for rural India.
Meanwhile, a small group of Indians based in Singapore had heard of Rai and sent him a ticket to visit them (Rai couldn’t afford the tickets for what would be his first-ever visit outside of India). They hosted a dinner of SO local Indians, sat through his presentation and a bunch of them committed some money to his plans, not expecting to get it back.
A bull in a china shop and keen to prove his theory, Rai returned to India, quit his job — to his wife’s horror — and set the ball rolling. He had earlier helped Vikram Akula in building SKS Microfinance as a friend and consultant and had become quite familiar with the micro-finance landscape in India. But the going wasn’t easy for Aavishkaar in its early days and by end-2003, Rai was struggling to keep his head above water. That’s when Mahajan pointed out that Rai was in a unique position — he knew more about micro finance than most people in the equity space did and he knew more about equity than most in the micro-finance space did. So why doesn’t he just marry the two?
He followed the advise and worked “30 hours out of 24” with his small team of equally committed people. At that time, Intellecap was assisting two billionaire Kiwi brothers, Richard and Christopher Chandler, find the right opportunity to invest in India’s micro-finance industry. Impressed with his handling of the deal, the brothers offered to pick up a majority stake in Rai’s business. Rai refused. “At the time, Intellecap had Rs. 1 crore in spare cash and I thought I was the richest man in the world,” he says. That apart, he also knew there were no free lunches and was scepti¬cal of the strings that might be attached. The Chandler brothers were not accus¬tomed to taking a “no” for an answer and persuaded Rai to sell 40 per cent in Intellecap for $8million. The year was 2007.
Our dinner is over and Rai orders a cap¬puccino. We are by now in 2011 and the pressure on Rai to find a way to return the money invested by the Chandlers was building up. So he took another mad gam¬ble, against the advice of all. He went ahead and created Intellegrow (an NBFC) and bought Arohan, a micro-finance com¬pany, which he got cheap at the peak of the micro-finance industry crisis.
As they say, fortune favors the brave. The Aavishkaar fund became one of the first investors in several early stage, highly successful MFIs of the day including Equitas, Basix and Utkarsh. Arohan grew by leaps and bounds and is the fifth largest MFI in India today.
Rai starts talking about a mind-blow¬ingly complex restructuring of the group that I tune out of and by the time I catch him again the holding company Aavishkaar Group has been born. The group sold stake in the holding company twice, raising over $100 million in two years (part of the money was used to buy back stake from the Chandlers), taking Rai and his associates’ share in the group down to just over Si per cent.
I interrupt to point out that many in the impact space have questioned his decision to venture into Africa and South East Asia, arguing that he’s bitten off more than he can chew. “Can we go wrong? Yes, we can. But if I don’t take risks, we die,” argues Rai.
If some describe Rai as a risk-taker, others say he is ambitious. The group today has Rs.8,O00 crore in assets under management, and by 2025, he aims to be well entrenched in the international market, with assets under management to the tune of Rs.50,0O0 crore. He’s also under pressure again to create exit options for his present set of investors.
I switch to a broader debate: Over the years, there has been criticism globally that the impact sector is seeking to take a moral —high ground and make other businesses appear soul—less. This lot argues that every business will have some impact and that the impact community comprises wolves in sheepskin. So does he see himself as a messiah for India’s poor? Rai holds no grand illusions. The impact sector isn’t really a “Florence Nightingale” and can— not solve the more complex problems that society faces. “If a child is dying of starvation or a baby girl is killed, what can I do?” he asks. He can only solve problems that lend themselves to a viable business model. Also, he’s in it because this is what he likes doing, not because he can “change the world”.
That more or less confirms my assessment of Rai —that he is grounded. He lives in Mumbai’s west¬ern suburb of Kandivali although lie can easily afford a fancier address iii the city. I also see him asking his driver to call it a day even before we finish dinner because he is concerned it might be too late for him to find trans¬port to get home.
We have been talking over three hours now. As we wind up, I tell him that he appears to be enjoying the perpetual— pressure-cooker work environment. “An entrepreneur should always remain under pressure or he will die,” he says simply. He just hopes many more are left better off at the end of this over—wrought journey.