According to Kotak Wealth Report, Ultra High Net worth Individuals want to create a positive difference in the society and impact investing is a growing trend among the elite. UHNIs are defined those with a minimum net worth of Rs. 25 crore.
Impact investments are made with the intention to generate social and environmental impact alongside a financial return.
Though impact investment is at a nascent stage in India the category is seeing fast–paced growth due to interest from Ultra HNIs. The report says that nearly half of the HNIs surveyed had some exposure to this novel investment area.
This segment not only satisfies the ultra HNI’s quest for new niche avenues for investment but also delivers the satisfaction of wealth creation while making a progressive difference to society. “Through impact investing, ultra HNIs derive twin benefits – one, investing in ventures that provide good returns (albeit over a longer timeframe) and two, the satisfaction of having created enterprises that will make a lasting social difference, a feeling that is hard to put a price tag on,” finds the study.
While the general interest for impact investments is high among all categories, professionals seem to have the highest inclination, with 67% saying they have exposure to these investments. This could be primarily because of their experience working in or being associated with some of these sectors. Among inheritors, 50% said they have an exposure to impact sectors, mainly as a diversification avenue from their core businesses that also gives them high returns.
However, among entrepreneurs, only 37% had an exposure; they said it was difficult because these kinds of investments might require their involvement (in addition to capital), which proves cumbersome. But established entrepreneurs are likely to show inclination towards such investments, the survey revealed.
Sectors in impact investing
Impact investments target companies catering to basic needs in an effective way, which would otherwise have remained unfulfilled. Most ultra HNIs are inclined towards three main sectors within impact investing: financial services - microfinance being the hottest sector (85%), clean energy and affordable housing (82%) respectively.
In case of financial services, RBI’s recent mandate to a few microfinance institutions to set up ‘small finance banks’ has resulted into renewed vigour and interest in the sector with prominent Indian family-owned companies actively investing in the sector.
Drivers of impact investments
The impact investments space is receiving traction from the ultra-rich in recent times – key drivers for this are attractiveness of the sector (34%) and stability of returns (31%). Other drivers include the social and environmental impact that these investments create. While impact investments are expected to provide stable earnings, they typically have higher growth periods and are turning out to be medium to long-term investment avenues for ultra HNIs.
Due to the level of interest from ultra HNIs in this segment, wealth managers have started incorporating impact investment in their suite of products.
Investment modes
Impact investments predominantly happen through three key routes – private equity, venture capital, and hedge funds. The survey showed that 54% of ultra HNIs preferred the private equity route for making impact investments, while 32% preferred the venture capital route for making bets on new initiatives.
Another avenue that is rising in popularity among ultra HNIs was direct investments through their ‘family offices’. These family houses independently scout for opportunities and conduct their own due diligence before investing into ventures.
