The social impact investors looking to transform Sri Lanka

By Madushka Balasuriya

Ever since Dragons’ Den first aired in the UK in 2006, the world has been hooked on reality TV shows centred around investors putting money behind budding entrepreneurs and their innovative products and solutions. In fact the popularity of this premise has been so widespread, that the show has even spawned several offshoots worldwide, the most notable of which being Shark Tank in the US.

That said, the rhetoric of these shows, from the music, to the investors, to the hardball negotiation tactics, is invariably predatory. Even the name aims to portray its investors in this same predatory aura – sharks and dragons are apex predators after all – where entrepreneurs are the proverbial lambs to slaughter only spared by their benevolent masters.

But in Sri Lanka there are a band of investors looking to do things slightly differently.

“Shark Tank investors are really sharks, even Dragon’s Den they’re really ruthless. But here we want impact investors to showcase a more nurturing side,” says Chandula Abeywickrema, Founder and Chairman of Lanka Impact Investing Network LIIN.

Abeywickrema, along with Selanka founder Eranda Ginige, is one of co-founders behind Ath Pavura, Asia’s – and most likely the world’s – first-ever reality TV show dedicated to social entrepreneurs and impact investors. And unlike its foreign forebears, Ath Pavura evokes imagery of the noble elephant protecting its habitat, which is also reflected in the investors being referred to as ‘tuskers’.

“People see how the tuskers are advising the entrepreneurs, and they see how we want to validate your idea. We’re determined to make these entrepreneurs succeed. And now after the first season people are starting to see the value of bringing in experts,” explains Abeywickrema.

Within six months of the first season being aired it has become the number one business program run by any terrestrial TV station, as rated by LMRB. In the first season alone over 2000 applications were received, which was then narrowed down first to 200, then 150, finally ending with 50 entrepreneurs receiving an average of one million rupees in private equity investments.

Among these have been a social enterprise looking to build a healthy society by providing quick, healthy and nutritious local food; another one based in Karuwalagaswewa manufactures paper and packaging paper using pulp waste and weeds deemed harmful for crop; and another one makes organic dehydrated fruits, vegetables and powdered spices, and have a 90% female workforce. “Millions of Sri Lankans watch this and are inspired to move into social entrepreneurship and impact investing. Today Ath Pavura is the only existing platform to create access to private equity for micro, small and medium social entrepreneurs in Sri Lanka,” notes Abeywickrema.

What is social impact investing?

 This shift in focus is not unique to Sri Lanka; the world at large is at present seeing the emergence of a new generation of investors, those who are interested in not only risk and return, but also impact. 

The difference between impact investing and regular investing is the commitment to measure and manage impact within portfolio companies. Impact management provides a means for investors to better understand the effects of their investments on people, communities and the planet. It enables them to quantify desired outcomes and adapt processes in order to improve them.

“No longer can the private sector be satisfied with the triple bottom line agenda of Planet, People and Profit – they need to move towards the quadruple bottom line. The missing P is Progress. Unless the profit is not driven towards the progress of the people and planet, there is no sustainability,” states Abeywickrema.

According to the United Nations Development Programme (UNDP), a study by the Global Impact Investing Network (GIIN) showed that “97% of respondents felt measuring social and environmental performance was ‘very important’ or ‘somewhat important’, as it could potentially improve financial returns and inform investment decisions.”

If impact measurement is carried out effectively, the UNDP notes that it can help unlock much needed finance, support key performance indicators as well as the company’s overall effectiveness.

Lack of access to funds for SMEs

For Abeywickrema these factors combined with the limited nature of Sri Lanka’s private sector solidifies his fervent belief that now is the moment to act.

“The time has come now to trigger this sort of thing, because we have a limited private sector and don’t have many big companies to invest in private equity – it’s a very small group of people and the pipeline is not growing. The reason it’s not growing is because there is no development at the micro and SME level.”

This state of affairs however is not down to a lack of intent; there have been several bouts of funding through several international multilateral lending agencies in terms of helping growth in the SME sector over the better part of the last century, yet the lack of development is conspicuous.

Abeywickrema, a former banker, explains that while foreign funds offer SMEs reasonable refinance schemes they come with generally unrealistic compliance requirements which sees “genuine SMEs” get overlooked in favour of bigger companies. 

Elsewhere, predatory lending practices mean less restrictive financing is also unfeasible, and even though the Government offers partially subsidised loan schemes this has a low repayment rate, he adds.

“When some international multilateral agencies come in at a 3-4% refinance scheme, they give a dashboard of compliance, and none of the SMEs can tick those boxes. So naturally that funding doesn’t come to the genuine SMEs. It goes back to the big ticket guys because they’re the only ones who can tick the boxes. 

“Microfinance is even worse. If you look at the lending side, prime lending is about 9% and commercial is about 12-16%, SME is about 16-24% and micro-finance is 25% and above. So can an entrepreneur take that amount of high-priced debt and survive? The government loan schemes are of course there, and they’re partially subsidised, but people take it and don’t repay.

“Jobs and Gates started in garages not through loans but because an investor took a risk and invested in them. We don’t have that kind of a culture here. Only option for any entrepreneur here is loans, and that’s a struggle. That’s why I was looking at creating this platform.”

A collaborative effort

To solve this issue and in the process empower Sri Lanka’s social entrepreneur ecosystem through the growth of a sustainable impact investing landscape, LIIN has enlisted two likeminded institutions in the United Nations Development Programme (UNDP) and Capital Alliance Group (CAG).

Last month the triumvirate signed two MoUs creating Sri Lanka’s first social impact funds – one for a $ 5 million Social Enterprise Fund (SEF) and one for a $ 20 million Social Impact Capital Fund (SICF) – targeted at helping social entrepreneurs access innovative financing.

The UNDP’s role is primarily to take responsibility for the impact measurement and management (IMM), while also nurturing entrepreneur development and the impact investment ecosystem and culture in Sri Lanka.

“Impact investors invest with a dual expectation, that the business receiving investment is profitable but also that a social and environmental impact is created through the business model,” explains Senior Economic Advisor at UNDP Sri Lanka, Kirthisri Rajatha Wijeweera.

“As such one of the key activities is to identify and implement the right IMM standard for the funds where all projects will be screened for social and environmental impact whilst also establishing mechanism for monitoring and evaluating (impact) outcomes. 

“This stream of work will leverage the existing global partnership with the Impact Management Project, which offers a wide range of partners and expertise to the methodologies. This will ensure that the desired social benefits would accrue from the projects.”

In terms of ecosystem development, the UNDP will be looking at further strengthening incubator/accelerator networks in the country, linking them with regional and global peers, as well as establishing a high level advisory board to oversee development of all parts of the impact investment ecosystem.  

“We believe that these initiatives will help establish a strong institutional base for social entrepreneurship which will help country achieve the UN Sustainable Development Goals,” adds Wijeweera.

For Ajith Fernando, CAG Managing Director, the move to join hands in creating the funds was a no-brainer despite admitting to not knowing all that much about social impact investing at the outset of their initiative.

“It sounded like an interesting idea, and I felt that in frontier markets it’s probably something that is lacking and something that good do a lot of good for the economy,” explains Fernando, who is happy to leave the social impact side of things to his partners.

Having founded Capital Alliance Group in the early 2000s, he has considerable knowledge when it comes to making investments in Sri Lanka, and it is this know-how that he brings to the table.

“While I confess to not understanding the social impact side of things, we understand investing. We know how to evaluate a project from a profit and loss perspective. How to see what kind of social impact it will have? That is where we think the partnership with UNDP will really come in handy.”

Accessing funds

Alongside the creation of the two new funds the UNDP also recently signed a Memorandum of Understanding with the Impact Management Project (IMP), on the sidelines of the United Nations General Assembly.  The IMP is a collaborative effort of over 1000 organisations, housed by Bridges Fund Management, that works with investors on delivering impact through financial investment. 

Working in partnership with the IMP, the UNDP hopes to establish Sustainable Development Goals (SDG) impact management standards, which will then be adapted for a country’s individual needs. 

The framework is expected to ensure that the impact is achieved in line with all 17 SDGs, with impact monitoring set to be an ongoing process and carried out periodically throughout the investment period.

“This is a growing area. The level of awareness in the country is still quite low. We might actually be a leading country in South Asia in terms of impact investments if we get this momentum going,” notes Wijeweera.

In terms of the ground realities of accessing these funds, he explains that while the incubation period of any product will continue to be financed by the “three Fs” – friends, family and food – it’s once the next stage of the product development cycle hits that impact funds or private equity become viable.

From an investor standpoint though, Fernando is keen to point out that while businesses and entrepreneurs with a social impact slant may be given a wider berth in terms of expected returns, they will still have to adhere to checks and balances of any other enterprise.

“We don’t want this to be a charity. This is not something we’re just giving as a grant. This has to be rational economic decision making with a social impact filter. I think that distinction must be made,” he states.

“Now as to whether we’ll be willing to accept a lower return for higher social impact, certainly, there is always going to be a balance in cases. In any project the returns we expect won’t be the same - we would look at various factors and judge the returns based on that. This is the same. And the social impact factor is definitely something we’ll be looking at when gauging the expected return.

“Would we tolerate bad management because the social impact is high? Absolutely not.”

Pix by Ruwan Walpola