Using grants to catalyse impact investment

Varun Sahni and Nadia Sood

The case studies on Husk Power and Greenlight Planet (June issue of Alliance) are great examples of the innovation that is taking place in the social impact space in India.

The use of pooled capital as a trigger to unlock larger pools of funds and access to commercial expertise is precisely what needs to take place if social impact businesses are ever going to achieve scale. In the case of Husk Power, it was very encouraging to read that philanthropic capital from Shell Foundation could actually catalyse the business to such a degree that it could subsequently bring in social and commercial investors, scale itself to 65 plants, and move into fundraising mode for a series A round. It is no less interesting to know that commercial investors, including IFC, are adopting a long-term perspective on their investments and are prepared to make high-risk investments into this space in order to open up the marketplace for other entrepreneurs and investors.

Innovation in these forms of financing is also starting to look at ‘waterfall’ structures for returns whereby the grant capital (which can be viewed as having a higher risk appetite) takes first loss if the investment does badly and a lower rate of return than other commercial co-investors if it does well. This gives grant funders both mission alignment and leverage.

This type of financing model can help unlock commercial capital earlier in the fundraising round and makes investing in this space more attractive to a larger set of investors. The challenge of course remains how to keep account of hidden costs and how to ensure that those businesses needs are still met when the grant capital runs out. If this type of innovation in financing is truly going to be catalytic, investors, philanthropic and commercial, will need to be willing not just to participate on a small scale with small investments but also to look at supporting larger investments both directly and through investment fund vehicles.

Varun Sahni and Nadia Sood
Impact Investment Partners, LLP

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