Apr182017
Posted by:The Caspian Blog Team
Four years of Impact Lending
Four years ago this day, our impact debt fund, Caspian Impact Investments (CII) made its first loan. Our balance sheet has grown 6x since then. We have deployed, cumulatively, INR 5 Bn/~USD 75mn in 66 enterprises and 125 loans across food & agriculture, financial inclusion, clean energy, affordable housing, affordable healthcare, education and livelihoods.
After a decade spent in financial inclusion, we consciously diversified our focus in 2013 to include debt and non-financial sectors. This was a result of a clear market need as well as our own ambition to bring our capital and expertise to other critical sectors. Could we do in other impact sectors what we had done in financial inclusion? Could we modify our ‘equity DNA’ to clinically assess credit risk in early stage enterprises? Our investors – Gray Ghost, Triodos and FMO – fortunately took a view that we should at least be allowed to try.
We did this slowly and deliberately, building networks and expertise in new sectors, one at a time. Shareholder support continued, with Triodos providing our first line of debt and FMO extending capacity building support to help us build understanding in Agriculture, our top new focus. The focus on diversifying did not mean exiting financial inclusion. It was prudent to start from a position of strength and build on it, so financial services was very much the base upon which we built the rest of our portfolio.
With loans ranging from INR 10 Mn to INR 150 Mn, the portfolio has been carefully curated. Our credit quality is proof that our strategy has worked well so far.
We were the first lender to 21% of our investees. 39% of our investees were loss making when we first funded them. Only 3 out of the 125 loans we have made are backed by mortgage collateral. This is not a typical (or ideal) portfolio for banks or traditional financial institutions. But then, competing with the banks was not why we were set up. Our capital provides the most lift in cases where bank debt is scarce for lack of scale, security and/or profitability. This is also the segment in which we are competitive, given the pricing and margins we work with. Our instruments have been varied – term loans, lines of credit, receivables finance, subordinated debt, securitized debt and, on occasion, venture debt – and are customized to the needs and risk profile of our investees.
Local debt remained scarce in our first three years. With the banks, we were simply not large enough (though we had an investment grade rating) and we could not provide collateral (ironically, this was the exact problem we were looking to solve for early stage impact enterprises). In 2015, however, we found a believer in OPIC, who came in as an anchor lender. OPIC’s USD 20 mn loan was a pivotal moment for CII. And beyond the financing, our interactions with OPIC during the due diligence process helped us make meaningful improvements to our risk monitoring and credit processes, laying a solid foundation for growth.
Today, we lend to financial inclusion, food & agriculture, healthcare, clean energy & energy efficiency, affordable housing, education, livelihoods, drinking water and technology for development. We also have a new shareholder in SIDBI VC, the Venture Capital arm of the apex bank for SMEs in India, whose mandate aligns with ours.
As an impact investor, we are designed to work with companies that bring innovative solutions to tough social and/or environmental problems. ‘Tough problem’ and ‘early stage’ often equal “high risk” for any investor, even an impact investor. Over the past 4 years, we could not have assumed the kind of risk that we did, without some critical partnerships. In the case of Food & Agriculture, it was the Rabobank Group, the experts in this field, with whom we are fortunate to have a knowledge and risk sharing arrangement. Another major partnership we forged was with USAID. The USAID DCA Portfolio Guarantee Program which we enrolled in was designed to encourage newer/better products, longer tenors and generally, loans to enterprises that may not otherwise have qualified for reasons of risk. With USAID’s support we have funded a number of such high impact companies across multiple sectors that we may have hesitated to fund otherwise.
Rabobank Group and USAID helped us take on greater risk when appropriate. Without them, our portfolio would probably have looked quite different, our impact that much more limited.
When we take a long term view of a sector, as we have done with Food & Agriculture for instance, it makes sense for us to go beyond individual transactions, as our knowledge and learnings from the latter will always be limited. We decided to therefore engage in the Food & Agri space at a much deeper level, with different players in the ecosystem including incubators (eg – NAARM), academic and research institutions (ICRISAT) and as many entrepreneurs as possible. This is a two-way knowledge sharing process – we learn of new developments, business models, successes (and failures), and the entrepreneurs benefit from our experience on how to manage typical challenges in early stage businesses (people, systems, technology…). This effort and engagement is not driven by the business team and does not have balance sheet targets. It is not designed to yield immediate pipeline but to establish our long term commitment to the sector. We will eventually replicate this for other sectors.
Underpinning our growth over the past four years has been our approach to risk management.
We do not invest in sectors or supply chains where we do not have a deep understanding of the risks and challenges – we actively build and depend on a trusted network of people and institutions who have the appropriate expertise and knowledge.
Our due diligence process is comprehensive and designed to help companies address any material gaps that we identify.
We structure and provide customized debt solutions appropriate for the need and risk profile of the enterprise and try to ensure that the risks and incentives are aligned to work for us as well as for the borrower. We use risk mitigation mechanisms when available and appropriate.
We rigorously monitor our portfolio on a monthly basis, so that we have a better chance of spotting an early warning sign before it manifests in to an actual problem. Our portfolio quality bears this out. After 4 years, 125 loans, 66 companies, our non-performing loans are <1%.
Finally, what allowed us the freedom and flexibility to choose credit quality over exponential growth, measured diversification over aggressive expansion, has been the long term vision and commitment of our shareholders and partners to help us build a high quality, resilient and durable institution.
