Corporate Angle Mr. Jai Ajmera Deputy Manager, M&A – Transaction Service Department, Deloitte Touche Tohmatsu India LLP,Mumbai.
Understanding Expected Returns In The Impact Investing Sector Valuation Perspectives Social investment is a broad spectrum ranging from pure profit-driven investing with some expectations of social impact to pure philanthropic grants. Broadly, social investments include Corporate Social Responsibility (CSR) expenditure, Socially Responsible Investing (SRI), and Impact Investments (II). While CSR expenditure is incurred without the expectation of financial returns, SRIs seek to minimise negative social impact. However, impact investing differs from SRIs and CSR in that it is made with the intention to generate positive and measurable social and environmental impact alongside a financial return. Impact investors also focus on investing in social enterprises that do not merely mitigate negative impact on the social front but also generate net positive impact, both from a social and a financial perspective. • A large number of funds mentioned above are incorporated and structured as private-equity, venture-debt, or venture capital funds, albeit with a greater emphasis on investment in companies involved in social development or causes. Several of these funds are also backed by LPs
who, while largely driven by the societal impact of their charitable corpus, are not disinclined from the financial returns that impact investments can generate particularly from scalable sectors in India. This is also evidenced in several exits that have driven substantial returns for investors from companies in largely social impact ventures. An analysis of actual returns from Impact Investments over a specified time period revealed the following: • Based on a study performed by Mc Kinsey & Co., the median Internal Rate of Return (IRR) on Impact Investment exits in India was 10 percent, which was higher than the risk-free rate in India by 300 basis points. These returns however, were lower than the market returns over the same period. A significant challenge, particularly when valuing impact investments using an income or cash flow-based approach, is determining an appropriate discount rate. Normally, the discount
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