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Somak Ghosh: A Contrarian Approach to Impact Investing

   /   Jan 14th, 2014Business, India

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Somak Ghosh was a founding member of YES Bank which, less than nine years after starting its operation, is now the fourth largest private sector bank in India. Last year he stepped down from his role at Motilal Private Equity to launch a new venture capital fund, Contrarian Capital, targeting underpenetrated markets in India. He tells Ben Thurman why he decided to move on from this role and how he aims to move the idea of investing in BoP businesses from niche to mainstream.

Ben Thurman: After two decades at Rabo Bank and YES Bank, you were awarded a public service fellowship at Harvard in 2011. What impact did this sabbatical have on your career goals?

Somak Ghosh: I pretty much knew what I wanted to do before I went to Harvard. In fact, it was part of a planned exit strategy from my role at YES Bank. But while I knew I wanted to create a fund for small growing businesses, my time at Harvard allowed me to flesh out the idea and sharpen the focus of exactly where I wanted to position the fund.

Thurman: When you returned, you were hired by Motilal Oswal Private Equity to launch a Sustainable Social Impact fund. Why was this idea ultimately abandoned and what did you learn from the experience?

Ghosh: The key element of my association with Motilal Oswal Group was that I would strengthen their real estate business and they, in turn, would provide a $5 million investment commitment to the fund, which would be set up as a 50:50 partnership. I felt it was a win-win combination.

Unfortunately, between an individual and a large organization the balance of power is with the organization. So while Motilal never really pulled out of the social enterprise venture, in terms of priority it never really got off the ground. Once this became clear I decided to move on and do this on my own.

The lesson that I learnt is clearly this: partnership is best consummated between equals.

Thurman: The name of your fund – Contrarian Capital – suggests an innovative approach. How are you different from other established players in the impact investing space?

Ghosh: Impact investment is a large domain but there are few funds – maybe 10% of total stakeholders – that are strictly for-profit with a strong social purpose. Most focus on the social impact and financially are about being sustainable, which means cost-coverage rather than providing investors with an opportunity for superior returns. That is one key area of difference.

Secondly, one of the outcomes we hope to achieve is “mainstreaming the industry.” Unless we can mainstream this asset class, global asset managers will never commit significant sums of money. That’s really important: this sector cannot remain niche, cannot remain CSR-oriented. We need to develop a broader stakeholder base not only for Contrarian, but for the industry as a whole.

Thurman: Many entrepreneurs complain of a lack of funds, while investors cite a lack of investible enterprises. Do you think there is a capital gap? Or do you see a lack of entrepreneurship?

Ghosh: My personal view is that it’s a capital gap; and that gap is accentuated by the not-always-helpful capital that is available. Often businesses access a lot of grant capital and their vision for the business, their focus – or lack of focus – on cost control and profitable growth take a beating. Because early “investors” who are essentially philanthropic grant-makers do not instill that consciousness, when the entrepreneur is looking for more mainstream capital, they fall short of the mark.

The second part is the confusion that persists in this sector: there are too many non-investible businesses because people with societal goals are confusing the issue. Often their business model is not suitable for somebody who wants a return of capital. So there appears to be a lot of funds in this business; but only a small proportion of funds and a small proportion of entrepreneurs are focused on delivering mainstream returns measured on mainstream metrics and delivering a social service. In this particular segment, I believe there is a capital gap.

Thurman: Why have India-focused funds struggled to deliver returns in recent years?

Ghosh: I would say that global investors and limited partners need to be a little bit more discerning about the kind of fund managers they are putting their resources in. India is a difficult country to invest in and funds which are raised in London or New York will be far less successful than funds which are run by local investment managers, with local teams on the ground with understanding of local business environment and challenges.

Thurman: You anticipate that the bulk of your investment will be in India’s fourteen poorest states. Why?

Ghosh: These states present a unique demographic opportunity. Along with the overall abysmal infrastructure, local state government is unable to meet its financial obligations. So there is a segment of the population that is not theoretically poor, but in actual terms is poor because their cash flow is insecure and highly dependent on a bankrupt state exchequer. If somebody is able to devise products of value targeting this economically floating population, it opens up huge business opportunities in offering healthcare or energy and water access.

Thurman: You spent a lot of time at YES Bank working on agribusiness – is this something you’ll look to continue?

Ghosh: In the development of my personal and professional interest in working with low-income populations, the two big domains that really influenced my thinking were agribusinesses and renewable energy businesses. Through this I came into closer contact with rural India and low-income populations, and that made me realize both the opportunity as well as the massive positive social impact that one could achieve. Definitely agribusiness remains a core area of focus.

Thurman: Finally, what advice would you give to an entrepreneur seeking early stage investment?

Ghosh: Most early stage entrepreneurs are so focused on immediate survival that they don’t have a long-term vision and don’t adopt business strategies which are designed for scale.

The first piece of advice: if you are in business, settle for nothing but scale. Don’t imagine yourself as a small business all the time, but think of yourself as a small growing business.

The second piece of advice is to select partners – whether your employees, shareholders, suppliers, vendors, or markets – who support the growth that you are aiming for and don’t restrict your growth choices.

Photo courtesy of Contrarian Capital.

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