Give a man a fish, and you feed him for a day; teach a man to fish, and you feed him for a lifetime.
Philanthropists the world over have been inspired by this simple but powerful statement, and have evolved from undertaking traditional notions of charity to philanthropy and now more recently, towards impact investing.
Impact investing bridges the gap between pure charity and donations for social, environmental and other causes, and pure investment aimed only at financial gain. As the world and, in particular, India, braces itself to battle increasing demand but diminishing resources, the deployment of monies in a manner that helps solve societal problems and conserve resources is not a luxury, but an urgent necessity.
Impact investing is an idea whose day has come. Mahatma Gandhi believed that the rich should be custodians of their wealth for the benefit of society, leading to a more egalitarian world. In this article, we explore why Indian family offices – being custodians of family wealth – should embrace impact investing that embodies this Gandhian philosophy. In doing so, they will not only contribute to society but also extend family legacies beyond the board room.
The World Economic Forum describes impact investing as an approach that intentionally seeks to create both financial return as well as positive social and/or environmental impacts that are actively measured. The term is often used narrowly as an asset class, but, in fact, it represents an investment approach or philosophy by which investments are made across asset classes. Such asset classes include venture capital and private equity, social impact bonds, municipal bonds, real estate and contribution to social venture funds.
Common sectors for impact investments include education, financial inclusion, clean energy, healthcare, fair trade, and preservation of natural resources, e.g. water. For instance, the investment by the Unitus Group in Simpa Network, a company delivering solar energy solutions to rural households, is an example of a clean energy investment. In the financial inclusion space, investments in 2017 by Lok Capital in Ummeed Housing Finance, which provides housing finance access to families with low and informal income, is a recent example.
The global market for impact investments is projected to grow to an excess of USD 300 billion by 2020. In India alone, it is estimated that more than USD 5 billion has been deployed in impact investments since 2010. While these figures may seem miniscule compared to the amounts going into traditional investment and philanthropy worldwide, they are steadily rising with a significant boost provided by family enterprises (family businesses, family offices and foundations).
Family offices (FOs) are formal or informal organisational structures that manage wealth and lifestyle needs for high-net worth and ultra-high net worth families. They employ this wealth to make investments on behalf of the family, the expected outcomes of which range from wealth preservation to wealth multiplication.
In recent years, FOs in India have become active investors, particularly providing seed or venture capital to start-ups. While some individual investments by Indian FOs into such entities may be classified as social funding (e.g., investment by Ratan Tata’s RNT Associates into Swasth India Services), FOs have not really adopted a strategic approach to impact investing. Reasons may include: a possible belief that investing in social ventures as a whole is not likely to yield high investment-grade returns; lack of awareness of impact investing as a strategy; and lack of availability, or at any rate access, to participants (including trained employees and consultants) within the ecosystem.
According to some estimates, there are approximately 200 FOs in India (each servicing either a single family or multiple families) managing wealth of more than USD 1 trillion, being deployed in traditional notions of investment such as equity and private equity, debt instruments and in philanthropic endeavours. Assuming that even a fraction of this wealth is strategically invested to address underdevelopment through sustainable and responsible means, it could result in a huge thrust towards achieving India’s developmental goals.
FOs and Impact Investing – A Good Match
FOs are well suited, much more so than traditional investors, to engage in impact investing. There are a few reasons for this:
- Impact investing enables families to align their personal vision and values with their investment decisions. Whilst families do articulate these values in the businesses that they run, these values can sometimes get eclipsed by the need to maximise shareholder value.
- FOs are not restricted by regulatory policies (unlike institutional investors such as pension funds or insurance companies) or strict investment mandates, and they have greater discretion in making investments.
- Unlike investment funds, FOs do not have a fixed fund life; therefore, their investment horizon is much longer. Some social ventures emerge profitable only after some years, and so, the ‘patient capital’ of FOs is much more likely to see profitable exits from such long-term ventures than that of investment funds with five to seven-year horizons.
- Families can play mentoring roles for the management of the investees and also provide them access to other participants within the ecosystem.
Approach for Impact Investing
The move to impact investing by FOs should be done strategically. The family should be clear in their minds, and hold consultations if needed, for identifying the values and causes that they feel most passionately about. They can also appoint one person within the family with the necessary skill set and desire to ‘champion’ this move. The professional investment advisory community can also be tapped for such specialist advice.
Initially, a smaller fund from out of the FO’s corpus may be earmarked for impact investing. The Ford Foundation, for instance, has committed USD 1 billion from out of its USD 12 billion endowment for ‘mission-related’ investments.
Then, in association with social venture advisors and other experts, a strategy / investing philosophy should be developed for such earmarked funds, identifying causes and assets in which to invest. As with any investment strategy, such assets should be diversified as per the chosen risk allocation strategy with debt instruments typically being safer than equity, and municipal bonds being the safest but bearing the least yield.
Let us take the example of a FO that wants to focus on the cause of healthcare, having earmarked certain funds for impact investing. Its strategy might involve identifying gaps in present infrastructure and developing approaches to address them by undertaking a wide and diversified range of activities from investing directly in equity of healthcare providers, to partnering with investors and NGOs to develop social impact bonds (similar to the Utkrisht Impact Bond, launched by USAID in 2017 with local Indian agencies, aimed at reducing the number of maternal and newborn deaths in Rajasthan), to developing a programme for purchasing healthcare equipment and leasing it to healthcare providers.
These causes should, however, be tested against the Indian regulatory regime. For instance, India’s education regulations prohibit for-profit companies. The Supreme Court of India has, time and again, held that colleges/ education institutions cannot resort to ‘profiteering’ or commercialise this ‘noble activity’. Thus, while investing for financial returns in education may not be permissible, investment may be made in ancillary education services (such as development of teaching material).
Instead of investing directly, the FO may also consider investing through an alternative investment fund (AIF) registered with the Securities and Exchange Board of India. Impact investment funds are either registered as ‘Category I AIFs’ which are social venture funds or regular ‘Category II AIFs’. Such funds have defined investment policies and are typically structured as private trusts; the investors / contributors are issued units proportionate to their capital contribution in the fund. A contributor’s return from the fund is through distributions made by the fund based on the income or exit proceeds received by it from its portfolio companies.
Investing in an AIF may be a preferable mode of impact investment by an FO, as it enables ‘outsourcing’ of investments to a fund manager, which would have sector expertise, experience and resources. A recent example of an FO investing in an impact investment fund is the 2017 investment in Aavishkaar Bharat Fund by the FO of Mr. Sunil Munjal of Hero Enterprises.
It should also be borne in mind that FOs that are companies required to do corporate social responsibility (CSR) under the Companies Act, 2013, are unlikely to be able to claim impact investments for financial return, either through AIFs or otherwise, as CSR contributions.
Finally, financial returns and impact should be monitored periodically, and the investing strategy should evolve on the basis of learnings from such monitoring.
There is a belief that investing can generate either financial returns or social benefit, but not both. Indeed, not all investments have to yield great returns for the impact investing strategy to be successful; it would be sufficient if some investments yield bumper returns. The venture capital rule of 80/20 (80% of returns are derived from 20% deals) ought to apply just as well. Interestingly, as per a recent report by McKinsey & Co., impact investments in India have generated a weighted average internal rate of return (IRR) of 11% in the past decade, and in fact, the top one-third of deals yielded an excellent median IRR of 34%.
What is more difficult to measure, though, is social / environmental, and generally broader, impact. FOs could appoint social impact consultants to agree on metrics on which impact is to be measured and to examine periodically whether such metrics are met.
Just as no two families are alike, no two family offices are alike. Therefore, there cannot be a ‘one size fits all’ approach to impact investing. Family offices should introspect and develop a philosophy and strategy that aligns with their wealth and values.
Formulating a strategy that is a correct fit will enable the family to embrace it more passionately and achieve greater success. This is the key.
Impact investing done right will lead to the Gandhian ideal where wealth is deployed for the ‘greater good’, thereby facilitating successful families becoming significant, and helping ensure their legacies and mark on the world lasts forever.
* The author was assisted by Shaishavi Kadakia, Senior Associate.
 Report of McKinsey & Co on “Impact Investing: Purpose-driven finance finds its way in India”, 2017, available at https://www.mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/impact%20investing%20finds%20its%20place%20in%20india/impact-investing-finds-its-place-in-india.ashx
 Karvy India Wealth Report 2017 available at http://www.karvywealth.com/india-wealth-report-2017/
 TMA Pai Foundation and Ors. v. State of Karnataka and Ors., AIR 2003 SC 355, and P. A. Inamdar and Ors. v. State of Maharashtra and Ors., AIR 2005 SC 3226.
 Supra note 1