Lok Capital is re-inventing strategy for social impact

New strategy to ensure that social ventures plough back their profit and do not take it out through dividends

Rajiv B Lall, 55, managing director and chief executive officer of Infrastructure Development Finance Company talks unlike his peers in glamorous investment banking and private equity business despite spending over thirty years with institutions such as Warburg Pincus, Morgan Stanley and Asian Development Bank.

Lall who holds a BA degree from Oxford University and a Ph. D in Economics from Columbia University discusses world history and finance at same ease and even puts it together for better use to uplift downtrodden. Lall also shoulders founder title for social impact fund Lok Capital and has a distinct vision for making such venture capital funds work better for desired results.

Through Lok Capital and Lok Foundation, Lall and his colleagues are currently exploring new strategies for supporting social ventures that are not just about making money.

“We tried to persuade micro-finance companies in our portfolio to plough some part of their profits back into the communities they serve.  But as an investor if you are only a minority equity owner it is hard to influence an investee company. At the height of the micro-finance boom some of our portfolio companies got caught up in the valuation game, and subsequently got into trouble when the bubble burst, said Lall.

 Lok Foundation is examining new ways for investing in ventures that aim to be commercially self sustaining, but not profit maximizing. One possible model is to support social entrepreneurship through Section 25 companies that are neither a charitable trust nor a for profit company under the Companies Act. It is not possible for a Section 25 company to distribute profits to shareholders in the form of dividends. Profit needs to be ploughed back into the company.

“So now this kind of structure would attract only a very narrow kind of investor and a very narrow kind of entrepreneur whose interest may be better aligned to build commercially sustainable business with a social impact,” he said.

Lok Capital's first fund was a $22 million fund which was deployed fully by 2010, its portfolio of investment includes company’s such as Ujjivan, BASIX and Janalakshmi. The company raised its second fund of $65 million this year from existing investors such as International Finance Corporation, CDC, and KfW and new investors Proparco and ASN Novib, Social venture capital funds typically have longer horizons and lower return expectations than venture capital funds that invest in more commercially oriented sectors.

Lok Capital’s initial investments were primarily into micro-finance companies to achieve financial inclusion. But now the fund is targeting areas such as public health, education and low cost housing to enhance its social impact. But Lall says that finding right firms for investment remains a challenge.

“There is such an acute shortage of residential housing in this country - forget about the bottom or the base of the pyramid, even in the middle or high levels of the pyramid - that it makes little sense for any entrepreneur to build a company focused only on the bottom of the pyramid,” explained Lall. This is true even for other industries such as education or health care where entrepreneurs are keen to first serve the needs of those who can afford to pay rather than look for ways of serving the needs of the poorest.