Lok Capital announces first close of third fund at $40.5 million

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Impact investor Lok Capital has achieved the first close of its third fund—Lok Fund III—at $40.5 million (about Rs.270 crore), a top executive said on Thursday.

The firm is aiming at a final close of $100 million and expects to achieve the target over the next 12 months, managing partner Venky Natarajan said.

A first close allows a fund to start investing from the corpus, even as it continues to tap limited partners (LPs)—investors in private equity funds—to raise additional money.

The first close saw participation by existing LPs such as British development finance institution CDC Group Plc, Dutch development bank FMO and French investor Proparco SA. TIAA Global Asset Management has come on board as a new investor.

For its third fund Lok Capital is also looking to raise funds from domestic investors. It is targeting raising around $15-20 million from domestic investors for the final close.

The firm plans to make around 14 investments from the third fund with an average ticket size of around $6 million. Lok Capital will continue to collaborate with LPs for joint investment in larger deals, as in Fund II.

According to Natarajan, the fund will be deployed in the next five years and will focus on growth-stage investments in financial services, healthcare and agriculture.

Lok Capital’s first fund was entirely focused on financial inclusion; its second fund saw it venture into sectors such as healthcare, education and agri-business.

“Based on the learnings from the second fund, we see that both healthcare and agriculture sectors in the country have a great potential. In healthcare, we are seeing more traction with companies expanding to tier II and tier III towns, which aligns well with our overall investment thesis of being an impact investor,” said Natarajan.

In agriculture, the firm is keen on investing in businesses such as warehousing, cold storage, contract farming, dairy and organized retail.

“More professionals have been getting into the agriculture space over the last five years. Our objective is to invest in business that improve the overall efficiency in the agri-supply chain,” he said.

In January 2016, Lok Capital invested in Pune-based Siddhivinayak Agri Processing, an end-to-end potato supply chain management company, marking its first investment in the agriculture sector.

Lok Capital will continue to invest in the financial services sector, especially in small and medium enterprise lending businesses, affordable housing finance and financial technology. The fund also plans to invest in a small finance bank, said Natarajan.

In 2015, four of Lok Capital’s portfolio companies received small finance bank licences from the Reserve Bank of India: Equitas Holdings Ltd, Suryoday Microfinance, Ujjivan Financial Services Ltd and Utkarsh Micro Finance.

Small finance banks will offer basic banking services, accepting deposits and lending to unserved and underserved sections, including small business units, small and marginal farmers, micro and small industries and entities in the unorganized sector.

The third fund will see the impact investor shift its investment strategy from early-stage investing to growth-stage investing (Series B and C stages).

“We have largely been a non-tech investor and in the non-tech space early-stage investing, the returns are not very appropriate to the risk you take. In sectors such as financial services, we will make early-stage investments, but in sectors such as healthcare, where early-stage risk is high, we will focus only on growth investments,” said Natarajan.

Since its inception in 2002, Lok Capital has been focusing on investing in businesses that impact the so-called bottom of the pyramid.

Lok Capital has completely exited companies in which invested from its first fund of $22 million; it has also existed from five of the 16 companies in which it invested from its second fund of $62 million.