Profile: Aavishkaar's Vineet Rai

Twenty years after leaving his forest in Odisha, one of India’s least prosperous states, Vineet Rai found himself in a villa overlooking Lake Como in northern Italy. It was 2007 and The Rockefeller Foundation had convened a meeting of microfinance and social venture capital practitioners to agree on a unified explanation for what they all did. It was here that the phrase impact investing – backing businesses that generate societal and environmental benefit as well as financial returns – formally emerged.

“Antony Bugg-Levine, who was a newly appointed managing director at Rockefeller, got a dozen of us together,” Rai recalls. “Of all the names we suggested Antony liked impact investing the most and he represented the money. He said, ‘I like this, and Rockefeller will back it.’ And they did.”

Aavishkaar Capital, which Rai had established in 2001, was among the first groups to receive funding from the foundation. While it took another seven years for impact investing to gain traction with the broader global institutional investor community, that meeting came to define what Rai describes as the second phase of a career in which his assets under management (AUM) have grown from $100 to $1.2 billion.

The third phase has yet to play out, but it begins at a point when impact investing is becoming increasingly mainstream, with an assortment of global private equity firms raising capital for the space. Notwithstanding his reservations about how the phrase impact investing is being stretched to cover a wide range of activities, Rai is bullish.

The goal is to achieve AUM of $12 billion by 2030. Impact will account for one-quarter of this, with the rest in existing consulting, microfinance, and small business lending operations.

From the trees

It is an unlikely journey from the forests of Odisha, although perhaps not incongruous with an interest in fostering enterprise in less developed areas where agriculture still dominates. Rai has met one other former forester in private equity: Kasper Svarrer, who leads frontier markets financial inclusion at Denmark-based Maj Invest.

That said, Rai’s introduction to forestry came by chance. For high-school graduates from middle-class Indian families in the early 1990s, there were two accepted career paths: medicine and engineering. Rai wanted to join the army but repeatedly flunked the interview. “They probably found me too radical and absurd,” he says. A family friend suggested the Indian Institute of Forest Management. Out of 10,000 who took the exam, Rai was one of 30 called for interview.

“I went there and just fell in love with the building, it was an architectural marvel. I got a scholarship of $300 a year, which was a lot of money at the time; today, the same institute charges around $5,000,” he recalls. “We were introduced to the concept of climate change, why trees are important, how you manage things, project finance. They were trying to create sustainability managers.”

Rai was hired by a paper company and dispatched to Odisha, where he was responsible for the welfare of 3,000 employees as well as the bamboo they cut and stacked and the roads on which it was shipped out. A three-year stint ended when Rai got married. “My wife didn’t find the forest so enchanting, and she gave me a short time to find a job elsewhere,” he says.

Rai found employment in 1997 with the Gujarat state government, which wanted to establish an incubator. He was 26 years old and knew little about incubation, but neither did anyone else in India at that time. The remit was to identify ideas with commercial potential emerging from farming communities and help turn them into businesses.

Early projects included a bullock-drawn cart with an in-built hydraulic tilting function that meant it could be used to scatter fertilizer rather than having women and children performing the task by following tractors around fields. Rai went to the National Institute of Design for assistance in optimizing the prototype, chiefly by making it lighter, helped the farmer secure funding for a production base and raw materials, and then secured a $10,000 bulk order.

“I was so excited, but the farmer was disappointed. He said he didn’t want to make 100 carts, he only wanted to make two carts,” he says. “It taught me that innovators don’t want to provide the same thing 100 times over, so you need a business guy. We paid a guy $1,000 to handle the $10,000 order and the farmer got $9,000, which left him with a $2,500 margin.”

Other investments followed a similar pattern: acquiring intellectual property rights, putting in place a commercialization plan, and finding an entrepreneur to execute it. A persistent challenge was that capital and talent didn’t want to come to rural India. Rai – spurred by a self-acknowledged arrogance that belied his 29 years of age and three-and-a-half years in the job – went to his board and suggested establishing an investment fund. The board gave him short shrift, so he quit.

“I decided to launch a fund called Aavishkaar that I thought would take money to rural India. I had my life savings of $100. I was ambitious, inexperienced and I didn’t know what venture capital meant. If I had known what it took to set up a fund, I would probably have never done it. I was so ignorant, but then naivete is important if you want to change the world,” Rai says.

He moved to Mumbai in search of potential backers and eventually found a group of receptive non-resident Indians in Singapore. Rai flew there – his first-ever international trip – to pitch them for money and left with $100,000. With Rai doing all the setup work, the fund received regulatory approval in February 2002, completed its fundraising in September, and made its first investment in December.

Introspection to ideas

Three years later, Aavishkaar crossed the $1 million AUM threshold. By this point, Rai was convinced his project would fail – $1 million wasn’t enough to drive real change. Bizarrely, someone was on hand to twist the knife. The UK government had commissioned a consulting firm to investigate well-intentioned business ideas that didn’t produce great results and Rai was chosen as a case study.

“The person interviewing me asked uncomfortable questions like, ‘If you get run over by a bus, what happens to your idea?’ He concluded that Aavishkaar was just one man’s passion, lacked an institutional structure, and therefore it would never scale,” Rai recalls. “Later, I realized he was right. Why was I on $1 million, not $10 million? Why hadn’t I built a team and introduced strong systems and processes? How many people had I helped get richer?”

Introspection led to activity. The Aavishkaar investment model was reoriented. Rather than focusing too much on how companies went about reducing rural poverty, the firm prioritized working with businesses that could scale and generate a return while addressing some aspect of the poverty issue. Rai returned to market in 2006 with a much clearer proposition and his AUM began to grow steadily.

Aavishkaar’s first investment in 2002 encapsulates some of its early challenges. Two entrepreneurs had invented a kerosene burner that was 35% more efficient than the competition. A six-year struggle to survive followed because retailers couldn’t be bothered to explain the virtues of a mass-market, low-margin product. The company eventually became a market leader and Aavishkaar exited with a 17x return, but it was a painful process for a small commitment in dollar terms.

By 2010, the firm’s AUM topped $30 million following the close of two more funds, focused on agriculture and microfinance, respectively. Aavishkaar’s involvement in microfinance started several years earlier with Intellecap, a consulting business Rai established using a $2,000 loan from his wife. It helped run a microfinance information portal for the World Bank and leveraged this experience into a string of consulting projects as microfinance took off in India in the mid-2000s.

Microfinance assets in India have risen from $50 million in the early 2000s to around $30 billion today. Rai maintains that, if it were not for the coercive lending problems that brought the asset class to its knees in 2010, his microfinance fund would have delivered a 10x return.

Nevertheless, the crisis did ultimately present an acquisition opportunity. Aavishkaar wanted to introduce technology to microfinance and Arohan Financial Services, a lender with around $6 million in assets, was available at a discount. The firm’s LPs weren’t keen on it, but they had no objection to Rai buying the business himself. Manoj Kumar Nambiar, an experienced international banker, was brought in to run it.

“Manoj made it profitable in 45 days,” says Rai. “Today it is the fifth-largest microfinance institution in India with around $700 million in assets and 7,000 employees nationwide. It is a very data-savvy company, with 100% of loans dispersed electronically and 54% of loans collected electronically.”

The final part of the Aavishkaar business emerged around the same time when Rai invested $500,000 in a specialist lender to micro, small and medium-sized enterprises (MSMEs). Now called Ashv Finance – taken from the Sanskrit word for stallion – it has around $70 million in assets and follows a cash flow-based lending model.

As each of these businesses expanded, Rai had difficulty reconciling his entrepreneurial urges and his fiduciary responsibilities. “There was a conflict of interest issue arising in the minds of investors: How could they support a guy who does so many things?” he says. “So, in 2016, I merged everything under one platform. Aavishkaar Group owns 100% of Aavishkaar Capital, 100% of Intellecap, 65% of Ashv, and nearly 40% of Arohan. And everything I own is through the group.”

FMO, the Shell Foundation, and impact stalwarts Nuveen – which is owned by TIAA – and Triodos Investment Management then invested $100 million in Aavishkaar Group.

What impact?

The fundamentals of the firm’s impact investing activities are largely unchanged. Technology is the key disrupter while agriculture, financial inclusion and essential services like healthcare and education are the major themes. Aavishkaar’s investments in agriculture range from inputs like seeds and fertilizer to productivity and mechanization to infrastructure. It has backed Agrostar, an “Amazon for farmers,” INI Farms, India’s first exporter of productivity-enhanced pomegranates, and Soulfull, which takes hardy millet and turns it into high-end breakfast cereals.

There are now six funds with AUM of $400 million, including $120 million for the latest India vehicle and $50 million for a debut Southeast Asia vehicle. An East Africa fund of $150 million has received preliminary approval from a few LPs. Getting to $3 billion by 2030 will involve launching funds that address different investment stages. One of them is likely to be a $400-500 million PE fund that writes checks of $30-40 million for existing portfolio companies with good growth trajectories.

Rai hopes these fundraising ambitions will coincide with a more nuanced appreciation of impact investing among LPs. He doesn’t begrudge the global firms that have swept into the space, collecting capital for investments that conform to the UN sustainable development goals but are later-stage and involve less risk than his own. After all, these funds could provide an exit channel for the likes of Aavishkaar, which has yet to deliver consistent performance across different vintages.

“People like the idea of impact, but they don’t want to give money to the guy who knows impact investing best. They want the guy who knows investing better in their eyes.” Rai says. “Money seeks security. They prefer the private equity model where you buy shares in a performing company than create a new set of enterprises that work with poor people.”

Ideally, LPs would divide up their impact allocations and make commitments to managers at the smaller end of the spectrum in recognition of the specific role they play in the impact ecosystem. However, it involves a different mindset and an acceptance that commercial-level returns, though achievable, may require more than a five-year hold.

Rai is reminded of the distinction between the idea of impact investing and real impact – or creating jobs and creating jobs in regions where employment options are very limited – whenever he goes on a road trip. The most recent was a 4,500-kilometer journey from Mumbai through villages near the Nepal border in Uttar Pradesh and back to Mumbai. Driving is an enjoyable pursuit, but in India it’s also a way of staying in touch with communities beyond the urban fringes, which remain a focal point of Aavishkaar’s work.

“Living in Mumbai, you can build a cocoon for yourself,” Rai explains. “If I don’t visit the hinterlands, I’m not going to understand the impact of COVID-19 on the economy, on my companies, on jobs at the grassroots level. The consequences would reach me in Mumbai nine months later. So, I drive. I stop and talk to people who are selling food, I visit farmers in their homes.”

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• Topics
• South Asia
• GPs
• Impact investment
• Aavishkaar Capital