LP Connect

Wishing you a very happy new year, Gaurav! Thank you for agreeing to do this interview for our newsletter.

01. To start with, could you shed some light on the UK’s presence in India? In specific, what is the nature and size of the FCDO’s investment portfolio in India and what have been your key focus areas for investment?

Happy new year to you and to all your readers!

The UK development partnership with India on inclusive growth and investment spans several decades. We have worked extensively with the public and private sector, industry associations, regulators, civil society and think tanks across key bilateral and global priorities. We have used instruments appropriate to the needs and state of development.

We adopted an investment approach in 2012 where, in collaboration with Government of India backed bodies, we have built a portfolio of c.$400+mn. This was mainly through investing in funds and lines of credit. Our portfolio spans sectors such as climate & renewable energy, infrastructure including urban, MSMEs/Startups & social enterprises. We targeted under-invested states and sectors and early-stage innovations that were designed for impact, with a view to catalyse private sector contribution to deliver on the Sustainable Development Goals.

We also have the UK’s Development Finance Institution, the CDC Group, which has been a pioneer investor for over 30 years with an investment portfolio of c.$1.7 bn.

02. To start with, could you shed some light on the UK’s presence in India? In specific, what is the nature and size of the FCDO’s investment portfolio in India and what have been your key focus areas for investment?

Three things make our approach distinct. First, we take a holistic view on economic development using tools such as inclusive growth diagnostics which help to consider the context and evidence for each of our intervention enabling us to set realistic targets. Second, we seek additionality and ensure alignment. A few examples: we took anchor positions in the Samridhi Fund, the first impact fund of Small Industries Development Bank of India (SIDBI) and the Neev Fund, the first low-income state infrastructure/SME fund with State Bank of India (SBI) Group where we linked incentives to results e.g. on quantifiable progress on ESG. We prioritized themes like climate, energy and environment with National Investment and Infrastructure Fund’s (NIIF) Green Growth Equity Fund; and focused on spurring innovation for the base of the pyramid with Rajasthan Venture Capital Fund. Our initial investments targeted the eight low-income states where we wanted to demonstrate their potential to other investors by our example.

Finally, we are an active investor. We take investment committee seats and we follow an investment plus technical assistance model so that what we learn firsthand, we can use to unlock barriers to investments and help build markets in a systematic manner, working with policy makers. Our evaluations have shown this deepens the impact from our investments.

03. Since we are at the beginning of a new decade, let me ask you about the UK’s larger plans for 2021 and the overall investment activity the UK has planned for India, in the years to come?

The formation of the FCDO at the start of this decade signals the coming together of the best of British development and diplomacy on a global stage, acting as a force for good in the world. This means solving the world’s most pressing developmental challenges such as climate change and building a cleaner, safer and more inclusive World in order to deliver on the Sustainable Development Goals by 2030.

Our approach in India continues to reflect the priorities of both countries. India is a laboratory for inclusive innovations, a test-bed for impact investments globally. We expect continued appetite to partner Indian entrepreneurs who create more affordable, effective, solutions that can be game-changers not only within India, but also across the World. We expect an increased focus on high-tech and sustainable finance as these can create the foundation for decades of inclusive economic growth.

04. The UK has been a strong supporter of the impact investing movement worldwide. The IMPACT Programme, in specific, was setup to strengthen the impact investing market and catalyse more investment that benefit the people and economies of Sub-Saharan Africa and South Asia. Could you throw some light on this unique initiative and its achievements so far?

The UK is a leader in promoting impact investing worldwide. Under the 2013 G8 Presidency, we set up the Global Steering Group (GSG) on Impact Investing, now a leading institution convening investors worldwide who seek impact. GSG has helped establish over 25 National Advisory Boards guiding domestic impact investing networks globally.

This includes through the IMPACT Programme which was setup to strengthen the impact investing market and catalyse more investment that benefit the people and economies of Sub-Saharan Africa and South Asia. The IMPACT Programme focuses on three strands to catalyse impact: 1) promoting standards for better impact reporting and disclosure, 2) creating tools and products that improve the flow and distribution of impact capital, and 3) deepening awareness and practice of impact investing.

For example, in 2019 the programme produced the ‘Investing in a Better World’ report, which consulted the British public to understand their appetite for impact investment through their savings, investments, and pensions, and found that 7 out of 10 UK savers want their investments to consider impact on people and planet.

05. The UK has been one of the frontrunners in impact investing and the government has been successful in formulating policy incentives and levers for the industry to thrive in the country. From your experience of working in the UK and India, what approach could the Indian policymakers adopt to create a more enabling environment for impact investing in India? Are there any learnings from the UK (with respect to instruments, incentives, overarching framework) that we can benefit from?

Policies shape an industry. In the UK, the government has built a strong foundation for impact investing through a number of initiatives. In addition to tax relief schemes, the government offers a range of direct support through solutions that bring together public services, businesses and communities. Big Society Capital, for example was set-up to build the social investment market. Fostering collaboration amongst players viz. research, businesses, investors is encouraged in several ways including through the Catapult network which sets-up theme-focused, cutting-edge physical hubs as a ‘one-stop-shop’ to help ‘catapult’ high-impact products and innovations from ideas to market.

Indian policymakers are open to ideas, listening to a variety of voices and very responsive. The first 5-years of Startup India have shown the reforms undertaken to catalyse the market and the many success stories. Robust and relevant data can provide necessary information to continue targeted reforms.

But data needs to allow for consistent and comparable analysis across geographies and sectors. Which is why we are supporting building of global (not just national) standards in the way impact is measured and managed. Initiatives like the ‘Impact Management Project’ help measure impacts on sustainability in a consistent manner. This is useful for policymakers, investors and investees alike.

06. The UK has directly and indirectly through CDC invested in multiple public and private Indian Impact Funds. With the blended finance space gaining traction can we expect the organization’s increased participation in some of these structures as well?

The UK has a strong focus on helping close the financing gap needed each year to achieve the Sustainable Development Goals by 2030. Mobilising private investment to deliver impact is central to our agenda. We have been working with Convergence to set up a blended finance working group, which unites more than 20 funding agencies and foundations to identify vehicles that can mobilise private capital at scale, whilst delivering high-quality impact. We are mindful of alignment of interests in blended finance.

In India, we are supporting new structures such as the first of its kind development impact bond in India in skills development which aims to improve the dropout rates especially for girls and women. We also recently launched a covid-19 ‘build back greener’ facility with the Neev Fund by creating a new class of equity shares to provide liquidity support to enable investees to continue to deliver high-quality impact.

07. What are your personal views on the future of the impact investing industry in India? What do you think the private and public participants in India should do to take the industry to the next level?

The future is bright for India’s impact investing industry. India can provide solutions to not just India’s own challenges but also the World’s.

A step change can happen if we: 1. enable single window clearance for impact investors especially those bringing capital into the country 2. align definitions by all participants in the industry and in regulations 3. incentivize transparency and provide better data on performance and impact to enable evidence-backed decisions

Push to diversify the investor base across the risk-return spectrum is now essential. For example, institutional investors who prefer debt-like returns or larger cheques need to be encouraged, as do those who take impact investments into tier 3, tier 4 and the villages. A culture shift where we profile such ‘universal’ impact plays as much as unicorns would boost mushrooming of new business models for impact across all parts of the country, including by women.

New high-caliber impact managers are needed, including to effectively tap into existing government-backed fund-of-funds schemes. Better aligned LP-GP models, well-directed incentives that promote impact and a culture where we value impact metrics such as job-creation disaggregated for example by gender, alongside profit and valuations can set the industry to scale new heights.