Ultra HNI clients new interest : Impact Investing

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return

Ultra-rich have almost always been great philanthropists. Their desire to share their bounty and to do good for the greater society is deep-rooted. However, for the last few years, mere charity has not been enough to satisfy their altruistic propensities. They want to build enterprises that not only create a positive difference in society, but ones that are self-sufficient, economically viable, and lasting; essentially, sustainable social enterprises.

This is the cornerstone of impact investing, which is a growing trend among the elite. Through impact investing, ultra HNIs derive twin benefits – one, investing in ventures that provide good returns (albeit over a longer time frame) and two, the satisfaction of having created enterprises that will make positive impact in society.

The impact investment, almost unheard of until a few years ago, is receiving close scrutiny of late. It seems to have become very popular among ultra HNIs.

 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. Though the sector is at a nascent stage in India, it has seen fast-paced growth over the last few years. While the general interest for impact investments is high, professionals HNIs seem to have the highest inclination.

 Impact investments target companies catering to basic needs in an effective way, which would otherwise have remained unfulfilled. According to one survey that most ultra HNIs are inclined towards three main sectors within impact investing – financial services, clean energy, and affordable housing. This preference also translates into on-ground investments, with micro finance in financial services being the hottest sector within impact investing.

 Successful exits in micro finance coupled with good returns have added to the sector’s allure. The Reserve Bank of India’s recent mandate to a few micro finance institutions to set up ‘small finance banks’ has translated into renewed vigor and interest in the sector with prominent Indian family-owned companies actively investing in the sector.

Additionally, as seen in the lifestyle section, the interest of ultra HNIs in clean energy reflects in their investment preferences – this is also among the top sectors for impact investments.

key drivers for this are attractiveness of the sector and stability of returns. 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 gestation periods and are turning out to be medium to long-term investment avenues

 Impact investments predominantly happen through three key routes – private equity, venture capital, and hedge funds.

 Interestingly, HNIs go with the private-equity route for investments in financial services and clean energy (where companies have some vintage), while the venture capital route was popular for affordable housing