Social venture capital funds, as their name suggests, provide funding to businesses, which can positively impact lives and deliver reasonable returns to investors. They are commonly known as impact funds as the fund manager is expected to analyse the social value created by the businesses. As per SEBI guidelines, a social venture capital fund needs to invest at least 75% of its assets in businesses which have a positive impact on society. This sets them apart from their cousin venture capital funds which mainly focus on risk and returns.
Typically, social venture capital funds in India invest in themes such as financial inclusion, affordable healthcare, clean energy, education and agriculture. These funds invest in early stage start-ups in this space. They provide start-ups with seed investment, operational and technical support to set up the business and lay down the governance and compliance procedures. In addition, they may also provide business connections and help them get additional funding for growth. These funds may choose to exit the business once the company it invested in establishes itself. However, the exit strategy varies depending on the fund manager.
Globally, returns from social venture funds are shared between investors and the fund following the waterfall mechanism. First, the capital and a certain minimum profit called as the hurdle rate is distributed among investors. Any excess returns are divided among investors and the fund management team basis the terms mentioned in their scheme information document.
Social venture capital funds have been around for quite some time. Firms such as Lok Capital, Aavishkaar Venture Management, Elevar Equity and Menterra Venture Advisors have been operating for a long time in India. In 2012 SEBI classified social venture funds under Category 1 AIF (alternative investment funds). Some firms, which have launched a category 1 AIF social venture fund are Ankur Capital, Unitus Ventures and Planner India.
The structure of these funds is similar to other category 1 AIFs. They require minimum investment of Rs.1 crore and the minimum lock-in is for 3 years with an additional extension option of 2 years. Fund managers may charge around 2% annual fund management fees for managing the fund.
Generally, NGOs or socially conscious HNIs and UHNIs may be interested in investing in these funds. Globally, responsible investing is catching up. You can recommend these funds to your HNI and ultra HNI clients who wish to invest in social enterprises. You can also recommend these funds to corporate clients as a part of their CSR initiatives.