Microfinance for Bankers and Investors

Microfinance for Bankers and Investors

Summary of the Last Lecture • Securitization of Microfinance Portfolios • Equity Investments

Private Equity for Microfinance • Most investors new to microfinance equity will find it prudent to work through specialized equity funds set up specifically to invest in MFIs. The association of such funds, the Council of Microfinance Equity Funds, now has 25 members.

Private Equity for Microfinance • The total capitalization represented by CMEF is growing fast, not only because new funds are forming, but also because the old funds are launching recapitalizations much larger than their first rounds.

Private Equity for Microfinance • And this second generation of fundraising includes increasing numbers of private investors, though mostly still from the socially responsible arena.

Private Equity for Microfinance • For example, it took Stefan Harpe of Calmeadow, a Canadian nonprofit, more than three hard years of knocking on doors to raise the first $15 million for Africap, a fund devoted to MFI equity in Africa, and

Private Equity for Microfinance • nearly all of that came from the public sector. After making 10 good, solid investments, and one standout success (Equity Bank, Kenya), Africapquickly put together its second round, $50 million, approximately half of it from new private investors.

Private Equity for Microfinance • Bob Patillo, a shopping center developer from Georgia who became interested in microfinance first through philanthropy and later as a social investor, has made it a personal challenge to draw private investors into microfinance.

Private Equity for Microfinance • Patillo recognized that private investors needed quicker exit, greater diversity, and the ability to turn fund management over to a specialist.

Private Equity for Microfinance • He conceived of a fund of funds that would foster trading of MFI equity. Investors in the fund of funds would be buying a mixed portfolio across the microfinance industry as a whole.

Private Equity for Microfinance • Patillo also instigated the launch of the International Association for Microfinance Investors as a focal point for new investors wishing to enter the market via investments into existing funds.

Private Equity for Microfinance • IAMFI’s members include many familiar names in the mainstream investment world, such as Omidyar, MicroVest, J.P. Morgan, and BlueOrchard.

TIAA-CREF and ProCredit. • One of the highest profile deals in microfinance was the investment of TIAA-CREF, a California-based fund manager, in ProCredit Holding, a group of microfinance banks.

TIAA-CREF and ProCredit. • In 2006, TIAA-CREF ranked eightieth on the Fortune 500 list of largest corporations in America, with more than $380 billion in managed assets. In addition to its core business—

TIAA-CREF and ProCredit. • managing retirement funds—TIAA-CREF offers individual retirement accounts, mutual funds, life insurance, and socially screened funds. In 2006, TIAA-CREF created the Global Microfinance Investment Program (GMIP), funded with $100 million in assets from its $160 billion fixed annuity account.

TIAA-CREF and ProCredit. • This account represents some 2.3 million investors. It is significant that assets were pledged from mainstream accounts, rather than from the socially responsible investment account. GMIP is, in effect, mainstreaming social investment into the traditional portfolio.

TIAA-CREF and ProCredit. • The GMIP made its first investment of $43 million in the equity of Pro- Credit Holding, the parent company of 19 small enterprise/microfinance banks in Eastern Europe, Latin America, and Africa.

TIAA-CREF and ProCredit. • As of March 2006 the ProCredit Group had total assets of approximately $3 billion and more than 600,000 outstanding loans.

TIAA-CREF and ProCredit. • ProCredit Holding has advantages as a target for mainstream investors over individual MFIs due to its size and geographic diversification. TIAA-CREF’s investment in ProCredit responds to the support for social responsibility among many people within the fund manager’s

TIAA-CREF and ProCredit. • ProCredit Holding has advantages as a target for mainstream investors over individual MFIs due to its size and geographic diversification. TIAA-CREF’s investment in ProCredit responds to the support for social responsibility among many people within the fund manager’s customer base.

TIAA-CREF and ProCredit. • It’s also a good investment because of microfinance’s low correlation with other asset classes, according to Ed Grzybowski, TIAA-CREF’s chief investment officer.

TIAA-CREF and ProCredit. • This example illustrates how mainstream investment companies have handled some of the unfamiliarity of investing in microfinance.

TIAA-CREF and ProCredit. • The risk to equity was lowered by the Overseas Private Investment Company’s guarantee of some of ProCredit’s debt, by the currencies involved in the transaction and by diversification across countries.

TIAA-CREF and ProCredit. • Most important, investors trusted ProCredit’s growth, profitability, and stable track record. ProCredit is part of the “cream of the cream” of microfinance; there are few other possibilities that match its scale and quality.

Sequoia and SKS. • A few equity investors willing to dedicate their own staff resources have gone directly to individual MFIs without the mediation of an equity fund.

Sequoia and SKS. • In 2007, SKS, a large Indian MFI, received an equity investment by a mainstream venture capitalist, Sequoia Capital India. SKS Microfinance was a fast growing and newly profitable MFI serving nearly 600,000 women at the time of investment.

Sequoia and SKS. • SKS is tapping an immense market in providing not only microloans, but also a range of products including health insurance.

Sequoia and SKS. • Like many MFIs in India, SKS started life with very little equity and operated with extremely high leverage in its early years. Its growth prospects depended on raising a solid new equity base.

Sequoia and SKS. • SKS’s dynamic CEO, VikramAkula, attracted the venture capitalists of Sequoia Capital to provide the majority stake of an $11.5 million equity investment.

Sequoia and SKS. • SKS’s growth rate, product range, potential market, and leadership all made it attractive. Like Google and YouTube, in which Sequoia invested early on, SKS showed enormous growth potential, even though it had only earned profits for one or two years.

Sequoia and SKS. • At the time of investment those profits were quite modest. Getting in at this relatively early stage allowed Sequoia to obtain shares at a low valuation, which gives it good prospects for future returns.

Sequoia and SKS. • The managing director of Sequoia Capital India, SumirChadha, emphasizes that this is a purely profit-motivated investment. For SKS, the backing of a firm like Sequoia will bring expert business-building advice as long as Sequoia is part of its ownership group.

Sequoia and SKS. • Since the investment, SKS has continued to grow rapidly. As of 2008, SKS works in 18 states across India, reaching 3 million women with microcredit and related services.

Sequoia and SKS. • Indian microfinance is attracting other investors, too: in 2007, LegatumCapital, a Dubai-based private equity firm, made a $25 million investment in Share MicrofinLtd., another of India’s largest MFIs.

Conclusion • Investors of many kinds have opportunities to invest in microfinance. MFIs continue to increase in size and profitability.

Conclusion • There is room for more investment and more actors, and we encourage further partnerships and innovation, with the promise that efforts will not go unrewarded.

Conclusion • Thanks to many of the groundbreaking transactions discussed above, MFIs increasingly understand sophisticated financial debt and equity instruments.

In the Next Lecture • THE EMERGING INDUSTRY OF INCLUSIVE FINANCE

Summary • Private Equity for Microfinance • TIAA-CREF and ProCredit. • Sequoia and SKS.

Microfinance for Bankers and Investors