India’s middle class may be growing, but its increasingly prosperous consumers have not entirely embraced the aspirational lifestyles seen in Western countries. Families only a few generations out of poverty still feel pressure to make sure their most basic needs are met before engaging in discretionary consumption.

“You’ll hear people say this phrase, ‘Roti kapda aur makan.’ Roti means bread, kapda aur makan is clothing and housing,” says Mukund Krishnaswami, managing partner at midmarket-focused Lighthouse Funds India. “Think of the base level of Maslow’s hierarchy. People focus on the things they need most.”

For its second India 2020 Fund, which recently closed at $138 million, Lighthouse plans to capitalize both on consumers’ concern for practical needs and their desire to build better lives for their families.

Cera Sanitaryware, a maker of sinks, washbasins, faucets, and toilets, is a good example of the former approach. The GP invested INR706 million ($10.9 million) in the company this January, in the belief that people will look to replace or upgrade their sanitary facilities. It represents an improvement in living standards, but not an overall change in lifestyles.

Lighthouse is also betting that growing prosperity will lead to fundamental shifts in consumer tastes. While this could mean increasing interest in lifestyle products as seen in other markets, the firm sees other sectors as potential beneficiaries as well. This philosophy has carried over from the firm’s previous fund, illustrated by portfolio companies such as education services and management provider iDiscoveri Education.

For the second fund the GP wants to use market research to target more specific opportunities. Bikaji Foods, a snack maker to which Lighthouse committed INR900 million in 2014 from the new fund, demonstrates this refined approach. Lighthouse felt that rising consumer interest in food quality standards meant that India’s branded foods sector was due for strong growth. Based on its research and a successful earlier investment in cookie maker UNIBIC, the firm felt confident to pursue the deal.

Krishnaswami stresses that this strategy is not a new invention for the firm; it developed through Lighthouse’s experience with its first fund. The success of that vehicle – it has already returned about 50% of invested capital with six of its 10 portfolio companies still unsold, and is on track for a 2.5x return – has made the second fund more attractive.

New investors joining the fund include the International Finance Corporation (IFC) and the Overseas Private Investment Corporation (OPIC). There were also re-ups from every LP that committed more than $5 million to the previous fund, helping Lighthouse far exceed its $125 million target.

In addition to the firm’s investment approach, Krishnaswami believes that the stability of the management has helped attract investors. “There’s been a lot of turnover in funds, and we’ve actually managed to have very limited turnover, and no turnover at the top,” he says. “I think that stability and consistency is something that people like to see.”

(As published in AVCJ )