Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
invest in furniture, infrastructure or construction to grow their product offering.
Also, many of the schools’ financing needs fall outside the reach of both
microfinance providers (for which school financing requirements are too large)
and typical SME finance providers (for which the financing requirements are too
small). Gray Ghost Ventures specified that they pursued the finance avenue rather
than actually building and running schools because their market research found
local entrepreneurs were successfully delivering affordable education (across
regions, including in Kenya, Ghana, Dominican Republic, Peru, China and India).
Rather than competing with these local entrepreneurs, they sought to encourage
their success, applied their experience in the microfinance sector and entered the
education sector with a financial services model.
Based on conversations with Gray Ghost Ventures, the economics of the business
model sound attractive. While the interest rates are similar to microfinance (20–
24% on a declining balance), the operational costs per loan are lower given the
loan sizes are larger (minimum loan size is INR 500,000, or about $10,000). The
Indian School Finance Company is targeting a return on equity of 20% once the
business has reached scale (it is currently in its second year of operation).
Sector by sector analysis: Financial services
Given that the microfinance sector serving BoP customers is a more mature industry
with more widely available data, we take a different approach, extrapolating from the
available data on current market size. Modern microfinance emerged as a tool
intended to create a vehicle for improving the access of poor people to affordable
finance that could grow without reliance exclusively on donor capital. As such it was
a quintessential impact investment intended to create social benefit along with
financial return. While the microfinance industry continues to be a hallmark of
impact investing, the recent flurry of commercial activity in microfinance does call
into question whether all microfinance institutions will continue to constitute impact
investments. For the purposes of this analysis, we consider the potential market size
for microfinance that could be served by impact investors, but, as we have with the
other sub-sectors, recognize that not all the businesses that seize this market
opportunity will in fact have social purpose as an intent.
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