Lok’s customized approach using external parties and internal observations

About Lok Advisory

Lok Capital defines itself as a hands-on financial investor with social performance goals and standards based in India.

Measuring the outputs and outcomes of a social mission are crucial to understand how and if social missions are being achieved. While there are now an abundance of tools and frameworks, the conversation between funders and social purpose organisation is the crucial foundation for the impact assessment. In this conversation, parameters such as the nature of the social cause and how it can be measured, the criteria that could be selected, whether the assessment should be customised or standardised (with external impact assessment criteria such as IRIS) and finally what is the purpose of the IA and what actions follow different results are being discussed.

Lok Capital and its affiliate bodies take a “comprehensive and structured” approach to impact measurement, perceiving these evaluations as opportunities to ensure that the growth of their portfolio organizations is “undertaken in a responsible manner that achieves both commercial and social goals.” Lok aims to serve its portfolio by supporting each organizations’ impact measurement operationally, as well as helping to disseminate evidence of impact among clients, partners and the greater range of stakeholders.[1] Lok faced two major challenges and achieved solutions by tailoring their impact evaluation to their own capacity and context.

The Lok group: Lok Foundation, Lok Capital & Lok Advisory

The Lok group of companies and non-profits, founded in the early 2000s, comprises three entities (Lok Foundation, Lok Capital and Lok Advisory Services) collectively serving as a “bridge to help create and grow businesses that make social impact in a commercially sustainable and scalable manner.”[2] Lok Foundation, the advocacy and not-for-profit arm of Lok, sponsors Lok Capital’s venture capital investment activities (see below), with Lok Advisory providing advisory and fund management services to support the funds.

Focusing on the areas of financial inclusion, healthcare, livelihood, education and agriculture, Lok focuses on nurturing socially impactful businesses in India, a country perceived to have the unique quality of attempting “economic development… following political development.”[3] Lok notes that India’s entrenched social disparities create “an enormous potential for delivering commercially viable solutions to urban and rural poor.”[4]  Particularly in the area of financial inclusion (the most “fertile” form of social investment), Lok believes that the current climate of India, characterized by “entrepreneurial leadership and innovation combined with strong social and commercial motivation of management” presents a “compelling opportunity” to simultaneously generate reasonable financial and social returns.[5]

Lok Capital – from microfinance to healthcare and livelihoods

Lok Capital (“People’s Capital”) was founded in 2000 through a grant from the Rockefeller Foundation as a microfinance investor targeting the Base of Pyramid (BoP) segment in India.  Since then, Lok’s investors have largely included international development institutions like CDC Group PLC (the UK), International Finance Corporation (IFC), KfW (Germany), FMO (the Netherlands), and Proparco (France); as well as international non-profits like ACCION Investments.[6]

A self-described “hands-on financial investor with social performance goals,” Lok uses equity and quasi-equity tools[7] to invest (as full or partial stakeholder) in its 6 focus sectors: Financial inclusion, Education, Healthcare, Livelihood and Agriculture.[8] Lok currently manages two funds (Lok Capital I LLC, raised in 2006 and Lok Capital II LLC, raised in 2011),[9] totaling around US$90 million, which act as the “central entity” of the Lok group structure. As of September 2015, Lok Capital II has invested in 15 organisations across these six sectors, with financial inclusion being a predominant focus of 9 organisations:

  1. Utkarsh (Financial Inclusion)
  2. SEWA (Financial Inclusion)
  3. Aptus (Financial Inclusion)
  4. Drishti (Healthcare)
  5. Equitas (Financial Inclusion)
  6. IFMR Rural Channels and Services/ IFMR Holdings (IRCS; Financial Inclusion)
  7. LiveWell (Healthcare)
  8. Hippocampus Learning Centre (Education)
  9. MAS (Financial Inclusion)
  10. QED (Education)
  11. RuralShores (Livelihood)
  12. Suryoday (Financial Inclusion)
  13. Ujjivan Financial Services (Financial Inclusion)
  14. Vistaar Financial Services (Financial Inclusion)
  15. SV Agri Processing (Agriculture & Livelihoods)[10]
Refraction

A third fund, Lok Capital III, currently underway, hopes to raise a US$80 million by June 2016.

While Lok Capital’s initial goal was to work alongside other investors to seed microfinance businesses in India, in more recent years it decided to broaden its focus to include a wider range of business that create social impact in fields in addition to microfinance. This expansion of mission was catalyzed by the end of Fund I in 2008, which Lok’s team saw as an “opportune time to go back to the “why of [Lok’s] existence… [rather than becoming a sector-agnostic impact fund] we wanted to focus on inclusion areas in which a fund model could work… where deal flow exists and where the business models are similar to a microfinance model.”[11]

This also has motivated Lok to diversify its microfinance investments (including into MSME finance, housing finance and vehicle loans), and into the Small Finance Banks space going forward. As of 2015, in addition to its investments in livelihoods and health and education projects, Lok Fund II put 35% of its total investments towards traditional microfinance activities, with the rest put towards the recently introduced categories.[12]

Lok Foundation & Lok Advisory

The “charitable trust at the heart of Lok Capital,” Lok Foundation was established in 2003 in the wake of Lok Capital to further Lok’s mission of financial and social inclusion for low-income segments of the Indian population. Through provision of targeted grants and technical support, as well as conducting research and advocacy in areas pertinent to Lok Capital’s investment activities, the Foundation “supports and nurtures” dialogues and dissemination of knowledge surrounding issues of “social and political inclusion in India”.[13]  In addition to receiving grants, as a shareholder in Lok Capital’s two funds the Foundation sustains itself through its investment gains. Around 50% of the profits of Lok Foundation are used for the purpose of promoting advocacy and research.

The Foundation’s current initiatives include the “Lok Surveys,” aimed at understanding the “changing social and political attitudes in India” in regards to “specific issues across the principal hierarchies and cleavages in Indian society (caste, religion, region, class, gender and age).”  Findings from the surveys are expected to yield insights into political trends, gender issues and community cohesion.[14]

Finally a third arm, Lok Advisory, established in 2003, supports the Lok funds in advisory and asset management services.

Lok’s Impact Assessment Approach – the embedded model

Lok’s approach addresses two issues. Firstly, Lok’s investees’ scale their social impact when they scale their financial performance. Due to this, the two are supposed to progress together and are good indicators for each other. Lok ensures that this is achieved by embedding the impact criteria across various stages of its investment cycle (refer Appendix A for details). Secondly, Lok’s highly customized approach to IA is the result of Lok’s experience that the metrics of many internationally recognized IA frameworks (such as IRIS) are not easily applied to the Indian context or the nature of Lok’s portfolio social enterprises.   This has motivated Lok to continuously seek tailored and contextualized methods, including working in conjunction with the India-wide Impact Investors Council (IIC) founded by 4-5 leading Indian Impact Investing funds (such as the Omidyar Network and Caspian) to develop quarterly reporting templates across various Indian sectors and funds.[15]

Impact Assessment Process – using external partners and internal observations

Lok’s IA process begins with the development of a Social Action Plan (SAP) for each portfolio organization at the outset of the engagement.  This “individualized roadmap” helps the organization articulate its mission, assess ways in which the mission could be integrated into both its internal culture and external brand, and develop subsequent improvements and changes to its policies, systems and operations as steps towards the mission.

IA processes are embedded within the SAP, including activities like identifying a dedicated individual to manage social performance internally; developing and conducting a survey of beneficiaries to gauge potential areas for improvement as well as a longer term survey to monitor regular progress; ensuring that processes for submitting grievances are in place; and identifying which social indicators should be tracked for impact. Third party assessments, development of project timelines and responsibilities, and continuous tracking of pre-defined metrics are also included in the SAP.[16]

Lok, who use a combination of third party assessors and internal observations to gain an understanding of impact, have found that enlisting the services of a third party has many advantages.  Not only does it help provide resources to Lok that it may not have in house (each engagement requires between 30-45 days total to assess), but as Lok notes, interviewing of clients and employees is “an art within itself”: third parties specializing in customer services and interactions are simply more familiar with the social aspects of IA than Lok’s staff of investment professionals, perhaps, may be.[17]  Third party assessors are engaged on a project-basis for developing the SAP, normally sometime during the first year (or within 18 months) of investing.

While Lok does not have an internal dedicated IA team and often using operational matrices as proxies for what may be happening on the impact front, it relies on individual observations from its staff managers – who deal most directly with the portfolio investments on the ground – to form notions of what sort of impact is being made. As Rajat Bansal, Lok’s Investment Associate, remarks, “the onus is on the [Lok staff] to evaluate the company as an investment” and decide what counts as impact using their close relationship with the business model.[18]  These data and observations, which paint a qualitative picture of Lok’s impact, are passed from all the investment teams to Rajat, who broadly monitors the overall progress of the portfolio.

Our Field Staff with Customers
Lok Capital Field Staff with Customers

Using the insights

Regarding the measurement and subsequent management of metrics, Lok perceives an organization’s potential impact as a vital element of the business model and concept. Investment staff are “wired to think of impact as a critical part of the [business] evaluation” itself and use questions to guide their initial evaluations like “What is the intended impact? How will it be observed? Does the leadership of the organization have a mindset conducive to making this impact?”  This intertwined perception of social impact and business viability means that expectations for social performance are an integral part of the shareholder’s agreement as Lok embarks on each engagement; over time, as the business grows (and hopefully makes improvements as needed), Lok expects that its social impact would grow in parallel.  For instance, in the case of Vistaar Financial Services (see box below), the primary objectives of the engagement were to improve the governance and operational systems of the organization where possible, in the belief that the enhancement of delivery services would thus enhance impact.

Lok’s team is able to collectively assess questions of impact and have get “the views of people on the ground…[not just] high level perspectives” during its weekly group meetings, which bring together the staff of both the Delhi and Chennai offices to discuss Lok’s existing portfolio as well as potential investees. This dialectical process allows Lok’s “notion of impact [to] crystallize and become focused” – for instance, in a recent case concerning a dialysis center, the team had a discussion of the extent to which the dialysis activities could be considered “direct” impact and whether the dialysis centre’s model had the “inherent impact” Lok expects (Lok eventually decided to decline, in this case).[19]

Tailoring the impact assessment to the organisation

Lok believes it important to tailor expectations of impact to each organization’s situation in order to avoid over generalizations, but acknowledges that this presents a challenge to comparisons across multiple projects within or across sectors. Broadly, the two factors that go into the selection of the metrics are (1) suitability of the metric given the nature of the company’s operation; and (2) alignment with the broader, sector level metrics for the particular sector; taking this into account, Lok remarks that its most developed framework at the moment is for its financial inclusion organizations (one of Lok’s most established sectors). Defining Lok’s impact in Lok’s other focus sectors (health, education and livelihoods) on a broader scale “is a work in progress”, as Lok has only invested in 2 organizations in each sector so far: “We’re trying to bring about social change” and thus “don’t think that any set of metrics can capture [the highly subjective conditions of organizations’ impact]…there is a limit to which you can quantify such impact.”

Case in Point: Creating a Social Action Plan (SAP) for Vistaar Financial Services[20]

For Vistaar, a responsible community lender serving Tamil Nadu, Karnataka, Maharashtra and Gujarat, Lok enlisted the services of Microsave/Guidestar, a third party assessor, on a project basis at the outset of the engagement in July 2012 to take stock of Vistaar’s current impact and develop a SAP.

With regular guidance by a full-time Lok staff member, who monitored the process with phone calls every few days, Microsave/Guidestar conducted reviews, personal interviews and discussions to gain an idea of Vistaar’s operations and processes. A SAP was created with the objectives of enabling Vistaar to “become a more responsible lender, improving social governance standards at MSMEs and within Vistaar, build a community banking model to enhance portfolio quality by deepening Vistaar’s engagement with the areas and communities in which it operates and bolster the company’s sustainability by enhancing employee and customer satisfaction and employee retention.”

The results of the assessment were a list of suggested actions projected to help Vistaar meet its SPM objectives and a dashboard that tracked impact indicators both internally and externally (i.e. with staff and with customers).

Tailoring IA to the Indian context with international funder parameters

Lok co-founder Vishal Mehta notes that “There’s no single answer when it comes to impact and we have been developing specific approaches that are relevant to different sectors and companies. We do not want to limit our social assessment programs to completing checklists and forms. The social and responsible aspects of these businesses have to be seen in the DNA and culture of the organizations.”[21]

While Lok doesn’t rely on international impact assessment frameworks because of the unique needs of the Indian cultural, developmental and political context it works in, Lok does include certain reporting parameters drawn from its international funders, including the IDB and KfW, whose institutional “experience helped us figure out some parameters that can be tracked…and gave feedback on which of these are feasible to be tracked”. To continue tailoring their assessments to the unique contexts of Indian communities (on regional and local levels) Lok is currently working on a creating a quarterly reporting template that can track impact by sector in India and includes reference to other social dynamics in the country, like those of the caste and gender systems.[22]

Already, Lok’s 10 years of financial inclusion experience has allowed it to develop an India-tailored framework for its financial inclusion portfolio organizations.  The metrics of this framework (like target beneficiaries’ income levels, etc.) are classified in the Indian context, taking into account official governmental definitions of economic tiers and using data from the Reserve Bank of India to identify underserved districts.[23]

Lok’s Impact Assessment Tools

For its first fund, Lok’s reporting system was quarterly; for Fund II, Lok plans to continue the quarterly tracking and combine it into its reporting to its Limited Partners (LPs).

Social Action Plan (SAP)

Lok’s goal is to work closely with its portfolio companies to strive to ensure that the company is strategically integrating “social welfare” as “a core part of their business model.”[24] To this end, Lok engages with each of its portfolio companies to create a Social Action Plan (SAP), “a social performance audit” delineating the company’s objectives, vision, systems, processes, products and outreach.  Acting as a road map for the organization, the SAP is produced with Lok Capital, its partner company and an “experienced third party” [25] like consulting firm MicroSave[26]. (See box in previous section for a sample of SAP development process for portfolio company Vistaar.)

Social Performance Management (SPM) Reports

Lok additionally publishes annual and quarterly Social Performance Management reports on the social impact created by their portfolio companies, which they believe assist the business in understanding their clients and improving their operations.

The quarterly SPM Reports also act as a platform for Lok to track changes between quarters to gauge how shifts in the portfolio companies’ internal operations and external environment may be affecting their social performance – information that it can disseminate among its wider portfolio to assist them in learning from each other’s experiences. For instance, in a recent SPM Report the major suggestions for companies were “increasing the number of female employees and reducing staff [attrition],” two patterns that were demonstrated across the portfolio to yield positive benefits for microfinance companies.[27] The quarterly SPM reporting is currently being carried out for the funds’ LPs only.

In Sum

As mentioned in previous sections, one of the challenges Lok has faced in its mission is adapting its IA methods to fit the local contexts of its portfolio. While Lok addressed this challenge for its own organization, Lok is also involved in India-wide initiatives to achieve more relevant sectorial and geographic measurements. For instance, Lok is working to currently address in partnership with the Impact Investors Council (IIC). Another challenge was the issue of time and skill for research for which Lok partnered with external agencies while mixing the final evaluation with its own observations.

 

 

 

References

  • AVPN phone conversation with Rajat Bansal of Lok Capital in September 2015.
  • Impact Assets. Lok Capital profile, accessed on 8 September 2015 at http://www.impactassets.org/ia50_new/fund.php?id=a01E000000LMNFoIAP.
  • Lok Capital
    • Social Performance Management Report 2014 -2015: Making Capital Work for Communities. Lok Capital.
    • Social Performance Management Report 2013 – 2014: Investing for Inclusive Growth.  Accessed online on 8 September 2015 at lokcapital.com/wp-content/uploads/2015/02/lok_spm_report-2013_2014.pdf.
    • Lok Capital website, accessed on 8 September 2015 at lokcapital.com.
    • Lok Pre-Election 2014 Survey Report, accessed on 8 September 2015 at lok-foundation.org/pdf/LokSurveyShortReport.pdf.
    • Quarterly Microfinance SPM Report (Lok I)
  • Lok Foundation
    • Slidecharts. Lok Foundation and Lok Surveys, 4.
    • Lok Foundation website, accessed on 8 September 2015 at lok-foundation.org.
  • MixMarket. Lok Capital profile, accessed on 8 September 2015 at mixmarket.org/funders/lok-capital.
  • Global Impact Investing Network (GIIN). Investor Spotlight: Lok Capital. 29 August 2012. Accessed online on 8 September 2015 at thegiin.org/knowledge/spotlight/investor-spotlight-lok-capital.

Appendices

Appendix A:  Overview of Fund I & II Portfolios

lok capital

Appendix B: Lok’s Impact Model

The impact thesis is achieved through various levers which are embedded in the investment process followed by Lok, at various stages of the process.

  • Investment evaluation – as part of investment evaluation, the deal team presents a detailed impact thesis for the proposed investment which is discussed and deliberated upon in detail by the Lok team internally, as well by the Investment Committee (IC). In addition to identifying and defining the impact thesis, a critical assessment is also made of the promoter’s motivation and intent which is a key factor for the investment decision at Lok. To ascertain this, every promoter meets the Lok partners and at least two members of the IC before the opportunity is formally taken to the IC.
  • Investment documentation – once the investment is approved by the IC and all the commercial points are agreed to, Lok stresses on capturing the impact intent of all stakeholders formally as part of the deal documentation. This translates in multiple clauses, some of the key ones being an agreement to undertake an assessment of the social performance of the company, and agreeing to reporting formats which include certain impact related metrics.
  • Post-investment – the Lok portfolio companies report on their performance on a monthly or quarterly basis. The quarterly reporting includes reporting on impact metrics identified for the specific business and sector. Lok additionally undertakes a Social Action Plan exercise with select portfolio companies using a third party consultant.
  • Technical Assistance (TA) – with the support of its LPs, Lok manages a TA pool which is made available to the portfolio companies on a project basis for training and capacity building. The project is identified jointly by the Lok team and the company management, and is funded on an equal contribution basis. In certain cases where the portfolio company does not have adequate resources for dedicating to certain impact related initiatives, Lok also makes available high quality professionals through its Fellowship Program,[28] which is in its ninth year now.

 

 

 

 


[1] Lok Capital. Social Performance Management Report 2013 – 2014: Investing for Inclusive Growth, pp. 10.

[2] Lok Capital website, http://lokcapital.com/about-lok-capital/focus-sectors/

[3] Lok Capital. SPM Report 2013 – 2014, pp. 5.

[4] Lok Capital. SPM Report 2013 – 2014, pp. 3.

[5] MixMarket, http://www.mixmarket.org/funders/lok-capital

[6] Impact Assets, http://www.impactassets.org/ia50_new/fund.php?id=a01E000000LMNFoIAP

[7] GIIN, Investor Spotlight: Lok Capital.

[8] Lok Capital website, lokcapital.com

[9] Lok Capital website, http://lokcapital.com/funds/

[10] Fund I portfolio consists of Janalakshmi; Spandana; Satin; Ujjivan; Basix (write off); Asirvad; RuralShores; Suryoday; and Arohan.  Fund II portfolio consists of RuralShores; Ujjivan; IFMR Rural Channels; Hippocampus; Vistaar; Drishti; Suryoday; Everest Edusys/QED; MAS; Equitas; Aptus; SEWA; and Utkarsh & LiveWell.

[11] Global Impact Investing Network (GIIN). Investor Spotlight: Lok Capital. 29 August 2012. Accessed online on 8 September 2015 at thegiin.org/knowledge/spotlight/investor-spotlight-lok-capital.

[12] Social Performance Management Report 2014 -2015: Making Capital Work for Communities. Lok Capital, pp. 16 – 17.

[13] Lok Foundation website, lok-foundation.org

[14] Lok Foundation Slidecharts. Lok Foundation and Lok Surveys, 4.

[15] Phone conversation with Rajat Bansal, 6 October 2015.

[16] Lok Capital “Vistaar SPM Plan vFINAL.” Confidential.  Accessed 11 October 2015.

[17] Phone conversation with Rajat Bansal, 6 October 2015.

[18] Phone conversation with Rajat Bansal, September 2015.

[19] Phone conversation with Rajat Bansal, September 2015.

[20] Lok Capital “SAP Vistaar Summary.” Confidential.  Accessed 11 October 2015.

[21] GIIN, Investor Spotlight: Lok Capital.

[22] Phone conversation with Rajat Bansal, September 2015.

[23] Phone conversation with Rajat Bansal, September 2015.

[24] Lok Capital. SPM Report 2013 – 2014, pp. 7.

[25] Lok Capital. SPM Report 2013 – 2014, pp. 8.

[26] Email conversation with Rajat Bansal, September 2015

[27] Quarterly Microfinance SPM Report (Lok I), pp. 1.

[28] Details on the Lok Fellowship Program can be accessed here: http://lokcapital.com/lok-fellows/

 

 

 

 

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