Vikram Gandhi on how microfinance can produce financial and social returns

Vikram Gandhi set up Asha Impact in 2014 after 23 years in investment banking. Gandhi, a senior lecturer at Harvard Business School and senior advisor to the Canada Pension Plan Investment Board, explains how microfinance can produce both a financial and social return.

Why did you decide to establish Asha Impact?

During my time at Morgan Stanley and Credit Suisse, I had become interested in microfinance as it was moving from a charitable endeavour to a seriously profitable one that had the ability to scale up impact. I also recognised that a lot of the impact investment in India was being done by foreign investors – both at a fund and an institutional investor level – and I wanted to change this. I felt that if I could help mobilise capital from local, domestic high-net-worth individuals that would achieve another dimension of social impact.

How did you do this?

I started out investing my own money along with a friend and we hired a venture capital-type team. We’ve been clear that we’re following an investment, not a philanthropy, model and so we start out with whether an opportunity has the potential to create impact and then assess each deal according to usual financial investment criteria. Over time, as we’ve built a bigger network of investors, it has become more cumbersome, so we are now looking at raising a fund over the next 12 months or so.

What’s your most successful investment to date?

It would have to be Varthana, a company formed to provide loans to affordable schools in rural and semi-urban areas in India. The issue many of these schools face is that wealthy local people often donate land or buildings to set up schools, but they don’t have funds to pay for teachers or IT equipment. Varthana lends schools the money for this at market rates. Based on the financial analysis, we could see that the business model worked as borrowers always repaid. And the impact was clear – it would allow more children from lower economic communities to have a high-quality education.

When we invested, it was lending to 50 schools and we provided support with the business model, capital, access to our network and expertise. Varthana did another capital raise when it was lending to 1,000 schools and then, after less than three years, as the business scaled to 5,000 schools, we exited to private equity funds at a 6x return on our investment.

As an advisor to CPPIB, how is its approach to ESG and impact investing evolving?

I would say it has evolved considerably. Two years ago, for example, CPPIB hired a head of global ESG, which demonstrates its commitment to this area. But more generally, I think institutional investors are evolving their approaches. We’ve gone past the first phase of ticking the boxes, such as ensuring no child labour is involved – that kind of exercise is clearly important, but fairly limited in its scope.

Now, institutions have developed more sophisticated risk management tools around ESG factors which they are incorporating into decision-making. The next phase will be how you generate alpha by incorporating ESG – incorporating it into financial analysis is hard to do and still very much a work in progress.