What sort of financial return are investors seeing from inclusive business?
The commercial viability and bankability of inclusive business investments was a key topic of discussion amongst the investors at the Asian Development Bank's (ADB) 2nd IB Asia Forum, held in Manila in February 2016, particularly the development banks. It was clear that different organisations have quite different expectations of financial return from IB and structure their investments accordingly.
From the perspective of the Asian Development Bank (ADB) and the International Finance Corporation (IFC), inclusive business - by definition - is both bankable and commercially viable, with no trade-off between social and financial impact. Inclusive business deals must pass the same financial hurdle as any other deal. With the oldest and largest IB portfolio to date, IFC were able to inform the Forum how well their IB deals have performed. Eriko Ishikawa (IFC) referred to a recent IFC study that suggested the return on inclusive business deals is the same as other deals for debt, and slightly better for equity. A study conducted by the IADB showed similar results. Investments such as in Jain Irrigation and Manila Water helped to demonstrate the case for inclusive business investment.
However, DFIs vary in their return expectations and financing structures The French development bank AFD has created a social business window which is expected to take more risk and achieve lower financial return through low-interest loans supported by technical assistance (TA). Dutch development bank FMO shifted from a 5 per cent loss toleration to 10 per cent for inclusive business deals, and in equity accepted lower return.
Impact investors also noted different return expectations and experience so far. Unitus Fund expects 20 per cent + IRR across the portfolio with returns in the top quartile for venture capital. As home runs cannot be expected, this means each deal is held to a slightly higher bar (north of 20 per cent). No trade-off is expected between financial and social return amongst their choice of investee. However, the impact investment session also discussed that ‘hype’ about dual returns can be seen as a risk, and that philanthropic capital and blended finance are still playing a huge role in this space. For example, alternative types of finance are needed for:
- Earlier stages, pre-revenue and pre-profit businesses, which need more patient finance;
- Smaller social enterprises, some of which aim to generate a return, but not a market return, as they simultaneously deliver clean water, clean energy, women’s empowerment, and productive livelihoods.
- Impactful goods, services and infrastructure that could not be afforded entirely by the consumer, but fall also to the state to provide for (such as sanitation and irrigation, as per the example below from Jain, where subsidy contributes to the model).
Evidence of exits is only just emerging. Aavishkaar Fund, that began investing in 2012, has had 15 exits in India with positive returns and 6 write-offs so far. Most exits come from subsequent rounds of investment by growth funds and other equity investors.