Rajiv B Lall, 55, managing director and chief executive of Infrastructure Development Finance Company, talks unlike his peers in the glamorous investment banking and private equity businesses. Lall, who holds a graduate degree from Oxford University and a doctorate in economics from Columbia University, has spent about thirty years with institutions such as Warburg Pincus, Morgan Stanley and Asian Development Bank. He discusses world history and finance with equal ease.
Lall founded social impact fund Lok Capital. Currently, through Lok Capital and Lok Foundation, Lall and his colleagues are exploring new strategies for supporting social ventures that are not solely about making money. “We tried to persuade microfinance companies in our portfolio to plough some of their profits back into the communities they serve. But as an investor, if you are a minority equity owner, it is hard to influence an investee company. At the height of the microfinance boom, some of our portfolio companies were caught in the valuation game. Subsequently, they got into trouble when the bubble burst,” says Lall.
Lok Foundation is considering new ways to invest in ventures that aim to be commercially self-sustaining, not profit-maximising. One such way is to support social entrepreneurship through Section 25 companies that are neither charitable trusts, nor for-profit companies under the Companies Act. It is not possible for a Section 25 company to distribute profits to shareholders in the form of dividends; the profit needs to be ploughed back into the company.
“Now, this kind of a structure would attract only a very narrow kind of investor and a very narrow kind of entrepreneur, whose interests may be better aligned to build commercially sustainable businesses with a social impact,” Lall said.
Lok Capital’s first fund was a $22-million one. This was fully deployed by 2010. Its portfolio of investment includes companies such as Ujjivan, BASIX and Janalakshmi.
This year, the company raised its second fund ($65 million) from existing investors such as International Finance Corporation, CDC and KfW and new investors Proparco and ASN Novib. Typically, social venture capital funds have longer horizons and lower return expectations compared to venture capital funds that invest in more commercially-oriented sectors.
To achieve financial inclusion, Lok Capital’s initial investments were primarily aimed at microfinance companies. But now, the fund is targeting areas such as public health, education and low-cost housing. Lall says finding the right firms for investment remains a challenge. “There is an acute shortage of residential housing in this country, not just in the bottom or the base of the pyramid, even in the middle or high levels. It makes little sense for any entrepreneur to build a company focused only towards the bottom of the pyramid,” he says. In education and healthcare segments, too, entrepreneurs are keen to first serve the needs of those who can afford to pay, rather than scout for ways to serve the needs of the poorest.