Ten years, two funds and the first close of its third fund, impact investment firm Lok Capital is all set to change tack as it continues to bet on ventures that have a social impact.

Lok will focus on three sectors only – financial services, agriculture and healthcare. It has dropped education and renewable energy from the list of sectors it will invest in because it believes that it is difficult to build sustainable businesses in these two sectors while still catering to the bottom of the pyramid. Apart from financial services, where it will continue to do early-stage investing, Lok will invest in growth-stage ventures in agriculture and healthcare.

Lok has raised about Rs 270 crore ($40.5 million) of a proposed Rs 650 crore ($100 million) third fund. It hopes to raise the remaining money in the next 12-18 months and plans to invest the third fund over five years. The first fund, launched in 2006, was $22 million and the second $64 million. The first fund was mainly invested in the financial services sector, especially in micro-finance ventures. That was the time micro-finance institutions were taking off and Lok was among the early investors in the space, as it wanted to have a tangible impact and it also addressed the needs of the economically deprived.

At that time, recalls Venky Natarajan, Managing Partner, Lok Capital Advisors, it was easy to make a case as an impact investor to invest in micro-finance in India. “The MFIs,” he says, “used to be not-for-profit, they were all transitioning.” Then professionals with a background in the financial services industry entered the space with ventures such as Ujjivan and Equitas, which addressed the financing needs of the weaker section of society with sustainable business models.

Even when the micro-finance industry was hit by a crisis around 2010, Lok had started diversifying its portfolio, again looking at ventures with a strong “impact lens.” It started investing in healthcare, education, agriculture, rural employment while continuing to look at institutions in the financial inclusion space. Lok invested in two ventures in the education space – Hippocampus and Everest Edusys and Solutions. There were no investments in the renewable energy space.

According to Venky, Lok’s experience with the first two funds is guiding its strategy for the third fund, from which it will start investing shortly. He says the priorities of the people in the economically weaker sectors are entirely different, more so in the rural areas. “The priorities of the economically deprived are very different from the priorities of the people in the top of the pyramid. I don’t think we understood that very well initially,” he says.

For example, he says, education is being made out as the most important need. For the poor, this is probably the third or fourth on their priority list; it may be a little different in urban areas, where the poor are more aspirational and even send their children to private schools. In rural areas, this is not the case. Likewise, as far as healthcare is concerned, the poor will pay for emergency healthcare but regular, periodic health check-ups are not important for them. The more important lesson that Lok learnt was that for the poor, availability of capital was more important than the price at which they got the money. In the lending business, it is still possible to make money by focussing only on the economically deprived. “For them, the biggest priority is liquidity. They will borrow. They don’t care about interest rates, contrary to popular perception,” says Venky.

So, Lok will continue to invest in the early state in ventures in financial inclusion, while it will be a growth-stage investor in healthcare and agriculture.

Venky, however, strikes a note of caution as far as financial inclusion is concerned. He says with more companies entering the space and abundant liquidity in the market, ticket sizes of many of the micro-finance institutions have grown fast, following a relaxation in the single borrower limit. “We are in a situation where it may culminate in some mass defaults,” he cautions. Since the end borrower doesn’t much bother about the interest rates, lending institutions are competing on cheque sizes, he says. For instance, a borrower will tell an institution that is prepared to lend him only Rs 50,000 that another lender is prepared to write a much bigger cheque. “A customer bargains only on the amount that the MFI is willing to give and the rate of interest is not an issue at all,” says Venky. That is why, he adds, ticket sizes have increased alarmingly.

With the third fund, according to Venky, Lok will invest $2-6 million (Rs 13-40 crore) in the ventures for a significant minority stake, of around 20-25 per cent. In the previous funds, Lok’s minimum ticket size was much smaller, as low as $500,000. “Now, minimum I don’t want to do less than $2 million,” says Venky.

In the decade that Lok has been investing in India, what is its experience of social enterprises and entrepreneurs in that space? “I think 10 years back, it was largely family businesses and NGOs transforming, very few professionals. Today, the number of professionals wanting to become entrepreneurs has increased substantially. The quality of the ecosystem has changed,” says Venky.

Another change with the third fund, according to Venky, is that domestic investors are now willing to put in money. In the previous two funds, Lok had raised money from overseas investors, mainly institutions and multi-lateral lending agencies. Now, given its track record of returning money to investors and the quality of the entrepreneurs and their ventures, domestic investors are willing to put in money, he adds. (EOM).

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