Delhi headquartered impact investor Lok Capital, which manages $85 million over two India-focused funds, partially exited portfolio company RuralShores on Tuesday, earning a 6X return on its original investment. The exit is a milestone for the firm because it is its first non-microfinance exit and validates its 2012 strategy to diversify away from the microfinance sector — read more about why it decided to change lanes. Bangalore based RuralShores falls within what Lok Capital terms its ‘livelihoods improvement/ generation’ investment thesis. Shortly after the deal, we chatted with Lok Capital managing partner Venky Natarajan on some of the details of the exit. Edited excerpts:
Tell us about the exit. How much have you invested in this company so far?
I’m not at liberty to reveal the total investment we’ve made. But we have invested in RuralShores over three tranches so far. The first two were in 2009 and 2010, when we invested out of Lok Capital Fund I. This was our only non-microfinance investment from that fund. Then in 2011, we invested again from our second fund, Lok Capital Fund II (it invested $3 million). We’ve exited the investments made from Fund I and got a 6X return on our investment. But we remain invested through Fund II. We remain significant minority shareholders in the company.
Who has acquired your Fund I stake in the company?
I cannot disclose the identity of the buyer yet. But, it is a financial buyer.
When you invested in this company were you consciously looking at making a non-microfinance bet?
Not really. We didn’t have the BoP (bottom-of-pyramid) employability, livelihoods investment thesis framed at the time. We knew about RuralShores because some of our microfinance portfolio companies, for example Basix, were working with them. The founders — Murali Vullaganti, C.N Ram, G.Srinivasan, and V.V Ranganathan — are all very accomplished people. When we started looking at the company, we didn’t see it as a BPO (business process outsourcing) company. Rather we saw their potential to generate livelihoods in a sustainable and scalable manner for rural citizens.
Where was the company, in business model terms, when you entered it? How have you contributed?
The basic business model was in place. It pretty much took the global BPO model and applied it to the rural market — outsource work from the city to rural service providers and deliver a cost advantage to clients. But that meant taking on a lot of low-margin projects. That has changed in the past couple of years. Services have moved from basic data entry to more complex processes and margins have started to improve. One area in which we had significant influence was in terms of hiring the right resources. Like any startup, and rightly so, the company would not hire expensive resources in order to keep costs down. We were able to influence them into investing a little more in hiring the right resources in some areas. This has helped them to access and work with larger clients.
How has the investment helped shape dealmaking in Fund II?
Today, because of our microfinance portfolio, we understand the BFSI sector. Microfinance is a sector where businesses can scale up very quickly. But that is not the case with sectors such as education, health, agriculture and so on. You need to focus on improving livelihoods and raising income levels. Therefore, the common thread in all our investments from Fund II has been to focus on livelihoods and turn rural consumers into producers. RuralShores is the anchor investment for that strategy and it has played out well so far.
(Some of the other investments from Fund II include Everest Edusys, Drishti Eye Care and Hippocampus Learning Centers. Apart from RuralShores, Fund I has exited companies such as Satin CreditCare, Janalakshmi Financial Services, Spandana Sphoorty Financial and Arohan Financial Services. Fund I and Fund II have invested in 16 companies to date).
