Measuring Exits in Indian Impact Investments Author: Shaun Robinson

Date: 25/6/15

The Indian impact investing space is associated

with few exits and an unproven ideology of

social and financial return. This report

aggregates 64 exits over the past decade to

define investor performance across exits.

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PREFACE 2

HISTORY OF IMPACT INVESTING 3

INVESTORS: 3

SECTORS: 3

EXIT TYPES: 3

GLOBAL EXITS: 4

BEST PRACTICES FOR AN EFFECTIVE EXIT 4

TIMING THE EXIT: 4

TAKING THE RIGHT EXIT APPROACH: 4

IDENTIFYING THE RIGHT SELLER: 4

DATA SOURCING 5

EXIT MULTIPLE AND IRR METHODOLOGY: 5

DATA ANALYSIS 6

EXITS BY GEOGRAPHIC REPRESENTATION: 6

YEARLY EXITS AND CORRESPONDING IRR: 6

EXIT MULTIPLES AND IRR BY SECTOR: 7

EXIT TYPES BY SECTOR: 7

COMMERCIAL VS IMPACT INVESTORS: 8

INVESTMENT HOLDING PERIOD ON IRR: 8

RETURNS ACROSS EXIT TYPE: 8

EXIT STAGE AND IRR: 9

PRIMARY AND SECONDARY VS. SECONDARY EXITS 9

MICROFINANCE: 10

CASE STUDY 1: SKS MICROFINANCE 11

CASE STUDY 2: MILK MANTRA DAIRY PVT. LTD 13

CONCLUSION 14

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Preface India is poised for growth. A country at a tipping point, with an inherent entrepreneurial spirit, demographic dividend, and recent proliferation of access to ideas and services. The current ecosystem is conducive for investor capital with an already impressive record of high growth, scaled, for profit impact enterprises. The accelerated infusion of capital and the confluence of traditional investors with impact focused investors will test the nature of impact investing as financial returns and social impact intertwine. Ecosystem enablers will be paramount in establishing and standardizing impact measurement frameworks. As the pillars of impact investing are tested, the adoption of such practices will protect the integrity of the space as well as solidify the true social impact derived from the influx of capital. With almost a decade of impact investing activity in India, strong exits remain a persistent barrier to widespread market movement. The general consensus among industry practitioners is investor-friendly exits are limited with relatively lower returns compared to commercial investments and exits. This report compiles all available exit data within the impact investing sector in India, and critically examines these exits to provide clarity and analysis to an opaque field. Data mined from the past ten years of activity will be compared across a variety of inputs and factors to demonstrate trends in the space.

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History of Impact Investing A stark inability to provide access to basic energy, healthcare, education, water and sanitation needs through government means, and the unaffordable alternatives provided by various private ventures created a searing gap for the 800 million low income citizens of India. This converged into an unparalleled, widely untouched market with a disposable income of USD $358 billion1. This market was widely dependent on philanthropic and governmental programs or strictly commercial ventures. A shift to for-profit, impact enterprise was accompanied by the entrance of impact investors in the early 2000’s, presenting a pivot in traditional investment thesis. The dichotomy and gap between “impact first” and “finance first” narrowed through the efforts of pioneering investors such as Aavishkaar and Acumen. This infusion of capital sparked tremendous growth in impact enterprises and a new landscape emerged emphasizing scale and sustainability to drive both financial return and social impact.

Investors: Impact investing within India has benefitted from a range of domestic and international investors spanning commercial and impact focused goals. Development Finance Institutions (DFIs) contribute a majority of the incoming capital, with more than 90% of the total direct and indirect investments made in India (GIIN, The Landscape for Impact Investing in South Asia). This amounts to USD 5 billion in direct investments and USD 2.6 billion in indirect investments. This is coupled with impact investors contributing over USD 435 million across Fund Managers, Foundations, HNWIs, Family Offices, and Commercial Investors.

Sectors: A majority of the 220 plus impact enterprises to receive funding operate in the microfinance and financial inclusion sector, with 54% of impact investor capital in

microfinance institutions and 17% in Non-MFI financial inclusion1. While impact investors invest heavily within the financial services realm, DFIs have a more diversified approach. According to the Global Impact Investing Network (GIIN), manufacturing, renewable energy, financial services, and agri-business constitute 66% of the near USD

5 billion of direct DFI investment in India. Exit Types: The pressure to generate balanced social and financial returns presents a challenge as more investors enter the space. Investors allocating capital to both traditional and impact investments cite their top motivations for impact investments as; a commitment to be a responsible investor, an efficient way to meet impact goals, and a response to client demand. This is amplified by investor expectations, with 55% of investors expecting to realize market rate returns in their impact investments (J.P Morgan, Eyes on the Horizon). Lastly, difficulty exiting investments is a persistent challenge to the growth of impact investing. The four exit options available to an investor are IPO, secondary sale, strategic sale, and buyback. Exiting via IPO offers the highest return potential with the investor selling shares to the public market as the investee becomes listed on a public exchange. Secondary sales are the most common in the impact space, with a new PE/VC investor purchasing the equity stake of a company from an existing PE/CV investor. The investee is removed from this transaction with capital flowing only from the existing investor to the new investor in a purely secondary transaction, while the purchase of initial investor’s shares and an infusion in the investee denotes and primary and secondary exit. Strategic sales are defined as the sale of a PE/VCs equity stake to a third party company, which is typically larger and operates in the same sector domestically or internationally. Lastly, buybacks are the

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purchase of a PE/VC investor’s equity stake by either the investee company or its founders/promotors. Global Exits: Exit data is not readily available or easily accessible, but the data that has been aggregated demonstrates the accelerated growth in exits on a global scale. Fund managers make up the majority of exits, with 96% of investors seeking competitive return or close to market return. The sector distribution gravitates toward financial services, with exits in MFIs and non-MFI financial services totaling 34% of all exits. Agri-business and healthcare account for 12% each. The geographic breakdown favors South Asia, with 32% of total exits, followed by sub-Saharan Africa and WNS Europe each contributing 17% of total exits. Strategic sale and secondary sale are the two most frequently used exit strategies with 40% and 37% of all exits, respectively. The holding period for global impact investments is generally longer, with 42% of exit investments were held for five or more years (J.P. Morgan, Eyes on the Horizon).

Best Practices for an Effective Exit The success of an investment is measured by the returns generated during an investor’s exit. While investee companies might be extremely successful in expanding and generating profits, it is essential that this produces positive return to their investors. Typically, for an investment in a commercial entity, IRR and exit multiple become the key parameters used to analyze the magnitude of the return. However, impact investing has a double bottom-line approach where social returns and impact created are vital qualifiers for defining success. For an investor to make a socially conscious and financially strong exit, all exit options must be properly analyzed before entering an investment. This foresight will guide the

company’s performance and vision as the expected exit type will be communicated and anticipated at the initial investment stage. Impact investing separates itself from traditional investing through its responsible investing approach. Responsible investing explicitly acknowledges the relevance of environmental, social and governance factors (ESG) for the investor. This holistic practice is contingent on effective, strategically aligned exits. Once the investment is made, continuous efforts should be taken by the investor (hands-on or otherwise depending on the approach) to enable the company to shift growth stages and ensure a smooth and successful exit. Successful exits are framed by the following parameters:

Parameters for Successful Exit: 1. Timing the Exit 2. Taking the Right Exit Approach 3. Identifying the Right Seller

Timing the Exit: Plans for exit should be considered before entering an investment. Discussing exit planning with pre-existing shareholders, co-investors and management fosters an environment of transparency and trust. Exit planning should be included in pre-investment due diligence, dependent on the stage of market development. It is vital that capacity for growth capital and technical expertise mesh with the investee’s operations and vision. Responsible investors must enable and support investees and this alignment is critical for a successful deal and exit. Political aspects and other unavoidable, external factors can alter exit timing. Rarely, do exit opportunities materialize as planned, emphasizing the importance of investor adaptability and flexibility. Taking the Right Exit Approach: Selecting the right approach among the exit types is as important as timing the exit itself. It will be noticed in this report that there is significant difference in the return to investors through different exit types. External factors like political climate, investor confidence in the market, market performance among others have significant bearing on the type of exit to be favored by the exiting investor. Some of the key internal considerations while choosing the type of exit are company’s stage, fund life, tax-efficiency and duration of investment. Identifying the Right Buyer: Strategic alignment is critical, therefore, responsible investors must ascertain the buyer’s intention and commitment to the investee’s mission. Discuss the long term vision of the potential investor, and

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analyze the likelihood the investor’s actions will remain within the scope of the investee. Also, it is important to consider the potential investor’s ability to add value to the investee, this entails strategic direction, specialized expertise, and growth capital. Lastly, the exit should be contingent on the comfort level of the investee management team with the potential investor. Considering that most of the impact investors are skewed towards the seed, early and growth stages, exits in general for impact investors would be secondary to bigger commercial investors.

Data Sourcing The data collection process is a mixture of primary and secondary research. Unitus Capital has facilitated multiple exits in the space, and directly incorporated this data into the report. A majority of the deals analyzed are sourced from Venture Intelligence (VI), and such, information is a materialization of deal details communicated from investors to VI. A total of 64 partial and complete exits will be analyzed in the report. A single exit is inclusive of multiple rounds or tranches of funding, as well as multiple partial exits by the same investor, while a bundle of investors in the same company, at the same time, will be treated as a separate exit for each individual investor. Fifteen of the analyzed deals are sourced by Unitus Capital, with the remaining 49 sourced from VI. Exit Multiple and IRR Methodology: All data points from Venture Intelligence were rigorously evaluated for accuracy. Initial data points given in INR were converted to USD via www.Oanda.com, and all exit multiples and IRR figures are represented in USD unless specified otherwise. In case of multiple rounds of investment by an investor in a company, we have used the First-in-first-out method to arrive at IRR and exit multiple. Lastly, social impact figures, loan portfolio growth, and revenue growth figures are sourced from www.mixmarket.org. Deal exits were selected in accordance with the GIIN definition of Impact Investing, “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside financial return,” and align with Unitus Capital’s investment thesis. All exits within the energy sector represent renewable energy enterprises, and all healthcare and lifescience enterprises affordable and accessible services to the underserved.

The data analysis will present data collected across sector, year, exit multiple, IRR, stage of exit, type of exit, exit horizon, and region to establish trends within impact investing.

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Data Analysis

Exits by Geographic Representation:

In line with the regional investment profile of India, a majority of exits have occured in Southern India. This presents a clear linkage, as a high concerntration of investor capital resides in Karnataka and Tamil Nadu. Exits in Southern India are mildly diversified across sectors with 14 exits from Microfinance Institutions (MFIs), 10 from Education, 9 from Energy, 6 from Healthcare, and the remainder spread evenly across remaining sectors. As the ecosystem in Southern India continues to harness and enable entrepreneurial ventures, we expect the amount of investment and subsequent exits in Southern states to consistently grow. Western India has a significant proportion of total exit value, with exits in Suzlon energy, located in Pune, accounting for $921mm of the total $969 mm. Northern India has observed nine exits out of the 64 analyzed, with six of the nine exits from microfinance and financial institution sectors. Northern India has attracted attention from many ecosystem builders and impact investors due to the large untapped market1. It remains to be seen how the exit scenario shapes up in this region during the next five-year period, which is when most of the investments will reach the end of their cycle. Exit activity has been limited in the East and Central parts of India during the period under consideration. These regions have traditionally not attracted significant impact capital, but the investment climate in this region is changing due to increased intrerest and support from Development Financial Institutions (DFIs) like SIDBI among others. This attention might lead to further investment, but considering

its untested nature, it is a likely recipient of “patient capital.” The influx of mainstream investment with an emphasis in MFIs, Health Care, Agri-business, and Clean Energy bodes well for regions with established infrastructure and strong human capital capacity, indicating further investments and exits in such regions. Also, there are significant efforts from Government and Government-related agencies to advance and promote the most need-sensitive areas of India.

Yearly Exits and Corresponding IRR:

After 2010, the Indian impact investing space has consistently witnessed over nine exits a year. This figure is poised to grow with five exits already completed through March 2015. Given an average investment horizon of 4.3 years, and the increased activity over the past five, it is reasonable to assume more exits will be executed in the near future. This is an exciting prospect, as noteworthy exits are one of few constraints impeding massive expansion of industry movement. The spike in median IRR and median exit multiples in 2010 can be attributed to the blockbuster SKS IPO, with KISMET realizing a highly profitable return. The same year also recognized exits from a mix of commercial and impact investors in Equitas Holdings and Spandana Sphoorty Financial, netting significant exit multiple and IRR figures. With Microfinance and Financial Services dominating over the impact investing space, the AP Microfinance crisis in 2011 could have crippled the market. However, 2011 became the redefining year in the impact space, characterized by significant exits in other impact sectors; four exits in Education, two in healthcare, and two in Renewable Energy. Instead of collapsing, the market pivoted and diversified, limiting the dependence on microfinance and financial service enterprises.

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The median IRR and exit multiple across all 55 analyzed exits is 27% and 2.25x respectively. This historical performance provides a convincing foundation for confidence and future investments. Note, exits in 2005 and 2006 are removed from the data set as Citi’s exit from Suzlon Energy represents the only exit for the year and is an outlier, yielding an IRR and exit multiple of 333% and 48.72x respectively.

Exit Multiples and IRR by Sector: Unsurprisingly, the most successful sectors in the Indian impact investing space are Financial Services and Microfinance. Representing 22 of the 56 exit sample size, Microfinance has demonstrated a median exit multiple of 3.55x and a median IRR of 39%, while Financial Services realized 7.50x and 27% respectively. Thirteen of the 17 Microfinance exits occurred after the crisis in Andhra Pradesh in 2010. These exits are noted by a longer than average holding period, indicating investor patience. The Healthcare & Life Sciences sector is consistent, with exit multiple and IRR figures hovering around the median market return. Education is noted by volatility, with IRRs ranging from -36% to 249% and exit multiples ranging from 0.41x to 58.49x. Five of the 12 exits in Education generated negative IRRs. Agri-business investors have performed well despite the limited deal volume. Renewable Energy has generated modest returns, with strong exit volume.

Sector diversification and expansion is a priority to investors, with portfolio allocation shifting and increasing across Energy, Agriculture, Healthcare, and Education2. Leading exits in companies such as Green Infra (IDFC PE), Milk Mantra (Aavhiskaar), Eye-Q (Song Advisors), and

Educomp (Gaja Capital) demonstrate the immense financial potential of these growing sectors.

Exit Types by Sector:

Secondary sales are well represented as a percentage of total exit value across all sectors. The infancy of the market, risk stemming from extraneous political and economic factors, and unproven emphasis on social intentions limit the exit options for early and growth stage investors. While profitable secondary sales currently flourish, general market confidence will increase leading to more IPO exits in the near future, especially in Microfinance and Financial Services sectors. IPO exits are marked by high exit value and low volume across all sectors, but are particularly high in both parameters in the education and energy sector. The

education sector in India is marked by large players such as Educomp and Everonn Education who experienced astronomical rises and large IPOs, but later faced drastic declines in stock price. Considering the early stage of affordable healthcare and financial services, no IPO exits occurred during the consideration period. Despite the lack of IPO exits, healthcare has garnered a significant amount of secondary interests from investors. A limited number of strategic sale and buyback exits have occurred in exit value and volume. Strategic sales have had modest success, with a median exit multiple and IRR of 1.26x and 16.4%, while buybacks have not demonstrated viable returns, with 0.99x and -0.2% respectively.

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Commercial vs Impact Investors:

A total of US $1.66 billion in exit proceeds from 2005 to 2015 have been distributed across commercial and impact

investors. From this amount, we have removed two outlying commercial exits in Suzlon Energy to give a more accurate depiction of the proportion of impact and commercial exit values. These 2006 and 2009, IPO exits by Citigroup Venture and Chryscapital contributed over $921 million of the total $1.66 billion pool. After removing these two exits from the data set, exits from impact investors account for only 10% of the remaining pool value. Commercial investors have an aggregate entry investment of $243 million spread across 37 commercial investors, and impact investors have an aggregate entry investment amount of $37 million spread across 25 impact investors. Commercial investor exits are defined by marquee IPO exits. Chryscapital and Citi Venture netted a combined exit of over $921 million, while commercial investor exits in PI Industries, SKS Microfinance, Educomp, Green Infra, and Tree House Education IPOs resulted in a combined exit amount of $285 million. The highest valued exit for an impact investor operated in the Microfinance sector, with Creation Investments receiving over $14 million in the secondary sale of Grameen Koota. Twenty of the 25 impact investor exits were secondary sales. This presents a clear demarcation in the stage of invested companies at the time of exit as well as the difference in investment thesis of commercial and impact investors. Impact investors have outperformed commercial investors with the median IRR exceeding those observed by commercial investors,

benefiting from being pioneers in the growing Indian impact space.

Investment Holding Period on IRR:

Arranging the exits by gestation period attempts to define a trend between investment horizon and IRR. Causation is not readily apparent as mutlple variables need to be considered while broadly categorizing an input on subsequent IRRs. That being said, investments held for two to three years before exiting have performed better than their peers, with exits occuring from the second to thrid year of entry observing a median IRR of 50% and the third to fourth year window yielding a median IRR of 37%. The median IRR for all exits is 27%, with the width of each exit year spanning a 5% confidence interval above and below

the corresponding median. There is an even sector distribution across all exit horizons as well as a mix across commercial and impact investors. Exits occuring within the second and fifth year are the most volatile with a standard deviation of 111% and 107% respectively. Most of the negative IRR exits (Speakwell, Veta, and HHV Solar) occurred within the four to six year holding period. Holdings of six to seven, and 7+ years have performed well. A majority of exits within this timeframe are from mature stage enterprises, primarily in the Microfinance and Financial Services sectors. Notable exits include SKS Microfinance, Basix, Janalakshmi Financial Serices, and Excelsoft Technologies. Short term as well as long term exits have performed well in the Indian impact space.

Returns across Exit Type:

A majority of exits observed from 2005 to 2015 are secondary sales, with exits typically taking place during the growth phase of the investee. Secondary sales have yielded strong exit multiples and IRRs, both exceeding the sample

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size median. Exits via IPO have demonstrated the highest potential for return with only two exits resulting in a negative multiple and IRR (2i Capital in XL Energy and New Vernon in Everonn Education). An IPO is considered the ideal exit path for any investor, with the exit outcomes validating this claim. Despite this, the growing debate about the moral effectiveness of commercial means in social enterprises should be discussed. As more aggressive investors enter the market, and a wider understanding of the opportunities present in the Indian impact investing

space grows, impact measurement and regulatory practices will be essential in developing and protecting the integrity of the market’s mission3. Strategic sale exits have yielded modest returns, led by Navneet Publication’s purchase of K-12 Techno Services from Song Advisors, generating a 66% IRR for Song Advisors, and Davita’s equity share purchase of Express Clinics from Somerset Indus Capital Partners, generating a multiple of 2.4x and IRR of 40%. Increasingly, more international players have begun to look at India for acquisitions within their domain, highlighting the importance of the strategic sale as a key exit strategy in the future. Buybacks have historically been the least effective exit type, as this exit type is associated with low investee performance.

Exit Stage and IRR:

Out of the data set, 33 exits occurred during the investee’s growth phase, 22 during the mature phase, and nine in the early phase. Impact investors historically are the first movers in the space, with a majority of early and growth stage funding and exits. Investors have reaped the benefits of early stage risk as early stage exit IRRs outperformed growth stage. The greatest IRRs were received after proof of concept and scale with mature exits garnering high selling prices, and a median IRR of 39%. Average investor time horizon can loosely speak to the intentions and risks

apparent at each stage. Early exits were held for an average of 3.3 years, while growth and mature exits were held for 4.1 and 5.0 respectively.

Primary and Secondary vs. Secondary Exits

A majority of exits, 67%, result in only the exchange of equity shares from one PE/VC investor to the next. These exits have lower exit multiples and IRRs than exits involving primary and secondary transactions. As multiples and IRRs can be directly linked to investee performance, the more

favorable a return, the more likely the new investor is to infuse equity in the company along with the purchase of shares from the existing investor. This also speaks to the potential growth of an investee. Seventy-two percent of transactions with primary and secondary components occur during the investee’s early and growth phase, compared to 63% of secondary transactions.

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Microfinance:

The success of the Indian microfinance sector catalyzed the evolution of impact investing, with substantial investor returns sparking the capital potential of all sectors. With a median exit multiple and IRR of 3.55x and 37% respectively, despite the Andhra Pradesh microfinance crisis, MFIs continue to rebound and generate consistently strong returns for investors. Analyzing the Compound Annual Growth Rate (CAGR) growth of the gross loan portfolios, there is a clear correlation between the rate of growth on the subsequent exit multiple and IRR. GLP CAGR growth greater than 100% yield significant stronger investor returns than growth between 50-100% and less than 50%. This correlation, while intuitive, is not completely depicted in the findings, as the microfinance crisis crushed and slowed the growth of GLP figures, but patient investors made profitable exits. The GLP CAGR less than 50% bucket’s stronger IRR and exit multiple performance is attributed to two exits for SKS Microfinance, as investors invested at a very early stage in the company and exited at the IPO/post-IPO stage. The median CAGR for the increase of female borrowers is 68% and the median CAGR for revenue is 85%. The increase in access to financial services and focus on women empowerment has changed the landscape of India. Equitas Holdings illustrates the benefits a strong performing MFI can produce with effectively managed capital infusions. Kalapthi Investments and Aavishkaar Goodwell’s exits observed an increase in Equitas Holdings’ GLP of 428% and 343% respectively, an increase in female borrowers of 582% and 457% respectively, and an increase in revenue of 928% and 704% respectively.

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Case Study 1: SKS Microfinance SKS Microfinance was founded in 1997 by Vikram Akula. Formed as an NGO in December 1997, SKS began operations in 1998 in Tumnoor village of Andhra Pradesh. SKS Microfinance Private Limited was registered as a non-banking financial institution (non-deposit taking NBFC) with the Reserve Bank of India on 20th January, 2005 and pivoted from a non-profit organization to a for-profit organization. In 2010, it became the first MFI in South Asia to launch an IPO and get listed. SKS Microfinance has diversified its lenders among public and private sector domestic banks, private sector foreign banks, and institutional investors. Today, SKS has banking relationship with over 45 banks and financial institutions. Vinod Khosla, SIDBI, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, and Silicon Valley Bank are among the existing equity partners of SKS Microfinance. SKS is a publicly listed company on the NSE as well as the BSE with a total market capitalization of about Rs 5900 cr (as on 1st June 2015). Foreign Institutional Investors (FIIs) own 44.72% stake in SKS and the total public shareholding in SKS is 90.73%. SKS reported Rs 87.66 cr as Profit after Tax and Rs 803.06 cr as Total Revenues for FY 2014-15. Pre-IPO: • SKS Microfinance expanded its membership from 200k

in five States to 4 million in 18 states from FY’06 to FY ’09, branches also expanded from 80 to 1,353 during this period

• The gross loan portfolio increased at a CAGR of 162.9% from Rs 780 million as of March 31, 2006 to Rs 14,175 million as of March 31, 2009, and further increased to Rs. 28,000 million as of September 30, 2009

• Over the three year period from FY '06 to FY '09, profit after tax increased at a CAGR of 265.2%, from Rs. 16.47 million to Rs. 801.96 million

IPO: • SKS Microfinance issued shares at the upper price band

of Rs 985 and raised Rs 16,500 million at a P/BV of 6.68 and P/E of 36.3, its IPO was oversubscribed by about 13 times

• It recorded listing day gains of 10% on its debut on 16th August 2010 and a month later its share price rose by about 51%

Andhra Pradesh Crisis: • SKS plunged into crisis after the Andhra Pradesh MFI

ordinance was passed in October 2010 as AP accounted for 30% of its loan portfolio

• It had to write off Rs 1,300 cr as the collection of receivables fell from 99% to 11.5% and it lost almost 81% of its value as the share price dropped from Rs 1,402 on 28th Sept 2010 to Rs 271 on 9th May 2011.

• SKS recovered from the crisis by reducing its AP portfolio, optimizing its cost structure, improving cash flow management and raising fresh capital

Present: • SKS has reported a 47% YoY growth in their Non-AP

Gross Loan Portfolio, totalling Rs 4,171 cr in FY 2015, and reported PAT of Rs 187.7 cr for FY 2015, observing 169% YoY growth in PAT over FY2014

• It has made a durable foundation for sustainable growth by regaining its market share from 8% in June'12 to 10% as of Dec '14, upgrading its technology and reinforcing capital base by raising Rs. 398cr through a QIP in May '14

Exit during IPO: Sequoia Capital India II and Mauritius Unitus Corporation initially invested in March 2007, and partially exited SKS Microfinance through the IPO in August 2010. Receiving tremendous return, the exit was marked by a multiple of 18.11x and an IRR of 135.53% (First-in First-out basis).

The recent QIP offering in May 2014 received commitments from CLSA, IDFC, Credit Suisse, Macquarie, ICICI Mutual

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Fund, Amansa Capital and Morgan Stanley, raising Rs 398 cr at an issue price of Rs 225. The mark-to-market IRR for these investors is about 105% as of 1st June 2015 with a multiple of 2.04x.

SKS was touted as the ideal impact investment with the Pre-IPO boom and IPO generating stellar exits and remarkable growth. Unfortunately given its high leverage in Andhra Pradesh, the AP crises toppled portfolio performance. By diversifying their geographic operations, implementing risk controls, and improving cash flow management, SKS began the path to recovery and regained market share. With improved performance and demonstrable growth from 2012 onwards, SKS is proving their resilience and the renewed opportunity for investor returns.

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Case Study 2: Milk Mantra Dairy Pvt. Ltd Milk Mantra Dairy Private Limited was founded in August 2009 by Mr. Srikumar Misra with the conscious capitalist objective of building an innovative dairy products business with the latest technology, whilst creating sustainable impact among farmers. The company produces a range of dairy products like milk, probiotic dahi, paneer, lassi and buttermilk under the ‘Milky Moo’ brand, from its state of the art processing plant situated at Gop, Odisha. Milk Mantra is one of the very few private dairy brands operating in the region. Recently, the company has also launched a functional milkshake under the brand ‘MooShake’ across the major metros in India. Milk Mantra has a structured Ethical Milk Sourcing programme through which it collects the highest quality milk from a network of more than 40,000 farmers covering more than 500 villages. Milk Mantra uses innovative technology in processing and packaging for its products and has positioned itself as a premium and innovative dairy brand. It currently sells its core dairy products in Odisha, Kolkata and key markets in Jharkhand and Chhattisgarh. Milk Mantra received its first round of funding from a set of angels (including Mumbai Angels and a few NRIs) back in November 2010 when its state-of-the art plant was still under construction (first Tetra Pak plant in the eastern region). The angels together invested close to INR 5 crores in the company. This was soon followed by institutional funding from Aavishkaar I in January 2011 where the primary infusion was INR 4 crores (Series A). At that time, Milk Mantra was one of the few companies to receive institutional funding at a pre-revenue stage. Milk Mantra also received debt assistance from IDBI Bank for setting up its dairy plant, which commenced operations in Jan 2012. Within twelve months of commencing its operations, Milk Mantra raised a second round of institutional funding from Aavishakaar as a follow-on round in December 2012 where the company received INR 10 crores. Milk Mantra planned to use these funds to strengthen its sales channel and to expand to other states in the geography. The products then sold included high quality milk, curd and paneer. As a result, Milk Mantra expanded aggressively resulting in 365% growth in revenue for FY2012-13. During FY2013-14, Milk Mantra further strengthened its product portfolio by adding lassi and buttermilk, thereby increasing the proportion of value-added products. It further clocked a 140% growth in revenue during that year

and in order to fuel further growth raised Series C round of INR 50 crore primary infusion in June 2014 led by Fidelity with Aavishkaar’s participation. This round valued Milk Mantra at the best valuation multiple in the dairy space, validating the potential offered by eastern geography and presence of a premium brand. The primary infusion came in two equal tranches. The funds were utilized to expand capacity of its current plant, acquire a plant in western Odisha, enter new markets and launch functional milkshake across India. This round also saw Aavishkaar I and most of the angels making an exit from their investment. In terms of exit, the angels (on an average) made an IRR of 36.5% with an exit multiple of 3.05x for their investment in Milk Mantra. Aavishkaar I reaped a good IRR of 38.6% with a similar multiple and made a complete exit while the other Aavishkaar fund stays invested in the company. Milk Mantra has set a great example, where an impact-focused entity has been able to raise capital at a very early stage and has scaled up in an aggressive and responsible way to provide handsome return to its investors. Milk Mantra is one of the great success stories for non-MFI/ non-financial inclusion companies in the impact space and is on the right trajectory to achieve greater successes in the near future. It further proves that the impact space is not short of exits, provided there are quality organizations and visionary promoters.

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Conclusion Through the analysis of 64 exits, 56 of which have complete exit data figures, we have identified trends over impact investing space in India over the past ten years.

A majority of investor activity and exits have happened in Southern India, due to the presence of strong entrepreneurs, a relatively developed ecosystem, and the consequent investor attention

The microfinance crises was a catalyst for diversification, with portfolios expanding to other sectors

Exit deal volume has been consistently strong post 2010

Median IRR and exit multiple demonstrate strong returns at 27% and 2.25x respectively

Microfinance and Financial Services represent 22 of the 56 analyzed exits and have been the strongest performing sectors

Exits across Education, Renewable Energy, and Healthcare are well represented with consistent returns

IPOs have proven to be the most profitable exit strategy across the Agri-business, Education, Microfinance, and Renewable Energy sectors

Secondary sales are the most common exit avenue, and strategic sales are poised to increase

Commercial investors have realized over 90% of all exit value, while impact investors have reaped higher IRRs

Holding periods of two to four years have outperformed the sample size median IRR, and exits held for six plus years are traditionally successful exits in Microfinance and Financial Service enterprises

Impact investors exit enterprises during early and growth phases while commercial investors exit during growth and mature phases

Mature phase exits generate significant returns with a median IRR of 39%

Return metrics are contingent on investee performance, with higher returns yielding more primary and secondary purchases and lower returns yielding predominantly secondary purchases

The rate of Microfinance GLP CAGR growth can be correlated to exit multiple and IRR, with greater growth leading to greater returns

Given the nascence of the impact space, these trends are subject to change as more impact enterprises reach maturity and provide substantial returns through public offerings and strategic sales. We have offered a data subset that should spark investor confidence, and validate the impact investing methodology, proving social impact and financial return can not only coexist, but lead to significant investor gains.

Sources in order presented:

1. Intellecap. (2014). Invest. Catalyze. Mainstream. The Indian Impact Investing Story.

2. GIIN. (2015). The Landscape for Impact Investing in South Asia.

3. Whalan, H. (2014, March 28). Three Factors That Show Social Enterprise Might Start Seeing Bigger Exits.

Retrieved from www.fasctcoexist.com.

4. J.P. Morgan. (2015). Eyes on the Horizon: The Impact Investor Survey.