GP Corner

General

01. Caspian is one of the oldest impact investors in India. You were one of the first institutional investors in multiple micro finance institutions and NBFCs. Several of these are leading small finance banks today. Tell us about your journey, which started from being an early equity impact investor to a leading impact debt provider?

Caspian Impact Investment Advisers came into being in early 2004. In last 16 years of its existence, we have launched 4 funds and has invested over 2000 cr in Impact enterprises. We have been fortunate to be part of the entrepreneurial journeys of over 200 entrepreneurs and founding teams. We have played a pivotal role in development of 3 sub-sectors within the financial inclusion landscape – microfinance, affordable housing finance and school finance.

Our first fund Bellwether provided debt as well as equity to microfinance institutions. Our second fund IFIF expanded the scope of financial inclusion to include affordable housing finance and financial inclusion enablers. The realisation that professionally managed impact enterprises find it difficult to raise debt and a diversified capital structure (which leverages equity to bring in debt) leads to longer runway and better returns to investors, prompted us to set up a dedicated fund to lend to impact sectors. As we gathered lessons from the debt business across a variety of sectors we found opportunities in the food & agri, clean energy and small business lending and set up our fourth fund to invest equity into companies after the Series A stage.

This journey with its troughs and triumphs has been made meaningful and fulfilling by being part of several entrepreneurial success stories which established new paradigms in achieving impact alongside good financial outcomes, serving low-income customers sustainably and making positive change for communities around them.

02. Over the years, Caspian has expanded its investment portfolio and diversified from Financial Inclusion and the Food & Agriculture Sector to Education, Healthcare, Clean Energy and most recently, ‘WASH’ (Water Sanitation & Hygiene). What was the fund’s motivation to make this shift? How has your experience with the new sectors been?

Caspian has diversified into non-financial sectors first via Caspian Debt and then through the fourth fund which is an equity fund. Caspian Debt has lent over INR1600cr to over 140 companies over last 7 years Pan India. These companies serve 13 SDGs across multiple impact sectors such as Food and Agri, Clean Tech, Health Care, Education, Water and Sanitation, Small Business Finance, Affordable housing finance, Microfinance, School finance, tech for development and any other women impact enterprises. We set up Caspian Debt in 2013 with a thesis that impact enterprises with first generation entrepreneurs running new age businesses which are asset light find it difficult to raise collateral free, customised debt. We came with deep expertise in financial inclusion sector and with fair understanding of the real-world problems faced by scores of microfinance clients and micro-entrepreneurs. We set ourselves steep target of ensuring atleast 40% of our fund size into SMEs to ensure that we move out of our comfort zone. We branched into some of the early impact sectors through our eco-system development work especially for Food and Agri and Clean Tech sectors and bringing the deep expertise in-house. We have chosen the path to grow organically by building investment and impact thesis for different sectors with assigned sector leads within our investment team.

Some of the key metrics for our debt portfolio are:

• Ratio of FI to SME in the portfolio is 50:50.
• For 30% of the SMEs we have funded, Caspian was the first lender.
• Cumulatively Caspian debt fund has been deployed in the following key sectors
• 13% to 24 companies from food and agri sector.
• 12% to 24 companies from Education, Tech for development
• 10% to 15 companies in Health Care
• 6% to 12 clients in Clean Tech sector

Impact Management

03. Caspian has also been one of the organizations which has led from the front in terms of advocating for impact measurement and management practices. It is one of the first few Indian organizations to get a GIIRS rating and receive the B Corp certification. Tell us about the cumulative impact that you have created, as well as the internal practices and processes that you have followed for impact management?

Caspian has always been a trend setter in committing to measuring and monitoring its impact on the goals which we set for ourselves. Over our last sixteen years, we have tried to create a positive impact, articulate and measure it to evaluate how our capital is helping address pressing social and environmental problems. Caspian Impact Investment Advisers was one of the first fund manager to get GIIRS rating for its Funds and its underlying investments and B Corp Certification. Some of our key milestones are:

1. Awarded MIX Silver Award for promoting Social Performance Management, in 2012
2. Platinum rating for IFIF Fund in 2015
3. IFIF rated as Best for the World Top 50 impact Funds in 2016
4. B Corp Certification in 2017
5. Awarded Best for the World for Customers by B Labs for two years in the row 2018 and 2019

As a B Corp we hold ourselves equally accountable not only to our Shareholders but to all our stakeholders including employees, suppliers, communities, clients and investor partners. As we look at mapping impact from the work we do, it becomes critical for us to manage the needs and expectations of all our stakeholders from clients, investors to employees

Some of the social performance indicators are:

• Reached 20m people
• 13 SDGs impacted
• 38% of the companies have business models which positively impact women
• 40% of the companies are led by women
• 97% of the companies are MSME
• 83% of our portfolio companies have reported positive CAGR post Caspian investment
• 74,991 jobs created
• 92% of our clients will recommend us to other entrepreneurs
• Average duration of client with Caspian is over 4 years
• 98% of our employees understand how their work impact’s overall organisational goal
• 96% of our employees strongly feel that there is environment of mutual respect in the organisational and 100% employees feel that they have a safe work environment

Debt Funding

04. Tell us about the organisation’s debt strategy (sectors, due diligence, collections, moratorium). How has Covid-19 impacted your debt portfolio performance?

Caspian lends to business which operate in highly impactful sectors such as food and agriculture, clean tech, education, health services, financial inclusion. Caspian focuses on a niche set of MSMEs which are professionally managed, well governed companies which want to grow in a transparent and responsible manner. Our thesis is that a well-run company will be successful in the medium to long run and it is possible to lend to them without expecting mortgage collateral or expecting a three-year profitability when they have venture capital backing. This is not something a traditional lender would do

Our due diligence process helps to assess the business model, quality of operations, governance, management, and internal controls.

Our processes have always been rigorous. However, now apart from evaluating the business model, quality of entrepreneurs and execution, the impact of COVID on some of the sectors and business models will be closely examined for lending.

As we are emerging out of the COVID 19 situation, we are looking to convert many of our due diligence processes into virtual systems through our digital platform DIGIT@C.

Our diversified portfolio held up very well during the COVID. We selectively offered moratorium based on COVID risk/impact framework developed in-house. We have also offered additional funding to companies and sectors where we saw opportunities. Our lending volumes have gone back to pre-Covid levels during Q3 FY 21.

05. Caspian has continued making fresh debt investments even during the peak of the pandemic outbreak. Please tell us a little more about the proprietary ‘Covid risk framework’ tool that you use to make investments.

We re-started lending in June, while we continued to honour our working capital lines during this period. It picked up pace in third quarter as the lock down was lifted across the country and businesses started to limp back to normalcy. We registered ourselves as member lending institution with National Credit Guarantee Trust Company Ltd and brought the benefit of Emergency Credit Line Guarantee Scheme to over 20 of the eligible SMEs in our portfolio. Our internal COVID risk framework evaluated companies on the impact of COVID-19 on their (i) business model – sales, ability to execute, suppliers, employees and changing demand and regulatory environment, (ii)investor support, (iii) adaptability of their business model in the post COVID-19 environment and (iv) cash runway.

We internally adapted quickly to move from physical due diligence to virtual diligence and applied more rigorous thresholds for financial performance such as capital adequacy, profitability and liquidity for the companies. We have added 11 new clients since we re-started lending and 60% of our existing clients have been provided top up loans.

Market Outlook

06. Caspian has been a witness to the rise, fall and rise again, of the Microfinance industry in India. There is a growing digression from traditional microfinance to more tech enabled models today, what opportunities and risks do you foresee in these business models which go beyond traditional lending?

Two things in our experience which have never failed an entrepreneur in any of the sectors especially financial sector is setting up good governance practices and being transparent from day one of setting up the organisation. This is not something you postpone till you scale; it is the very thing which will help you scale . With increasing pressure on margins after RBI guidelines for NBFC MFIs came in after 2010 crisis many of the MFIs have moved to increasing digitalisation. After demonetisation most disbursement was channelised through digital mediums and after COVID the push for digitalisation is likely to move towards collections.

While tech enabled models bring in efficiency, we believe that connect with end client is critical for ensuring good repayment performance over the life-cycle of the clients. The challenge is to bring in efficiency of tech but still retain the customer connect of the early microfinance models to retain the virtuous cycle of credit discipline and improving lives and livelihoods irrespective of the external shocks faced by households.

07. Ahead of the Indian Budget 2021, what kind of support would you like the Hon’ble Finance Minister to provide in her budget announcements that could favour flow of capital to the ‘impact investment’ sector in India?

Impact investors such as Caspian who understand the funding pain points of the impact enterprises require support at three levels – one towards mitigating/minimising credit risk and second towards reducing cost of lending and third towards access to on lending funds.

Among the multiple schemes announced by the Govt for COVID relief for businesses, one of the most effective schemes in implementation and timely support to business revival has been Emergency Credit Line Guarantee Scheme. Govt should provide more such creative credit risk mitigation schemes which will improve the credit flow to SMEs which are a growth engine for emerging economy such as ours. TLTRO has also improved availability of on lending funds. Bank Lending to Impact Lenders like us should qualify as priority sector. Funds registered as Impact Funds under the AIF regulations should be eligible for CSR Funds. Any support towards reducing cost of lending to SMEs will be welcome.

08. Caspian raised $20 million in debt from US International Development Finance Corporation (DFC) in the first half of 2020. Do you plan on raising funds in the near future, or would you prefer to wait and observe how the market re-builds first?

In our experience of working with impact enterprises in last 16 years, we believe there is considerable demand supply gap for funding. We will continue to raise funds as well as find credit enhancement facilities to ensure that we continue to reach out impact enterprises across multiple sectors. We have continued to raise funds during the pandemic as well to meet the demand.

09. As someone who has seen and made successful exits in the financial services space, how do you reckon the recent trends of increasing impact investments in areas like healthcare, agriculture, education and other sectors? Should we expect a similar trend of successful performance and exits in these emerging areas too?

We welcome increasing share of impact funding to sectors other than financial inclusion. The investors however should not benchmark their return expectations and duration of exit based on the performance of financial institutions. Return and exit duration expectations for each sector should be based on the investment and business eco-systems of these sectors. The investment eco-systems of different sectors are not yet mature- some sectors have more early-stage investors and some have higher proportion of late-stage investors, regulations are also evolving hence each sector requires a different investment thesis and time horizons. It is important to remember that microfinance sector took over 30 years to reach this stage with significant investment by different eco-system players in its development. We should also be careful and not expect real economy companies to grow like pure play technology companies because in the underserved markets, technology is an enabler and not the complete solution.