Investing in Microfinance: An Investor’s Perspective 2 November 2012 Haikou, China

1. Investing in Microfinance: An Investor’s Perspective 2 November 2012 Haikou,China

2. Background • Grassroots includes Grassroots, US and Caspian Advisors, India • Grassroots has invested in 20 MIVs of which it created/ co-created 7. • These MIVs have invested in approximately 200 microfinance and related social institutions all over the world. • Investments have been in debt and equity. • Currently Grassroots co-manages or advises five funds: three equity funds in Latin America and India, one debt fund in India and one global fund of funds. 1

3. Goals for Double Bottom Line (DBL) Investments • DBL Investments: financing a social enterprise or business to simultaneously achieve financial and social objectives • Financial Objectives: • Returns: return of principal / below market return / market / risk adjusted return • Liquidity: liquid / patient capital • Correlation: low / negative correlation • Social Objectives: • Bottom of the Pyramid financial inclusion: income smoothing, savings, insurance, remittances • Impact: improved health, education opportunities, gender empowerment, poverty alleviation Bottom of the Pyramid, is defined as the low income population un-served or underserved by mainstream institutions 2

4. Who Invests • Public Investors / Development Finance Institutions • Private Institutional Investors • High Net Worth Individuals (HNWI) • Retail • These investors have different priorities and combinations of financial and social objectives. 3

5. MFI Balance Sheets and Opportunities to Invest • Donations/ Grants • Loans • Member shares • Loans • Deposits • Equity • Loans • Deposits • Not for Profit • Cooperative • For Profit/ Shareholder Company 4

6. What do we look for in an MFI? • Limited control: other than covenants / calling the loan, investor has limited ability to influence activities of investee company post-investment • Concerned with avoiding / mitigating risks that threaten loan repayment; no “upside” • Promote “prudent” growth, stable profitability • Concerned with over-leveraging, terms of other lenders, subordination • Debt • Equity • Partnership: active on Board, have influence on direction of business post-investment • Financial Return depends on scalability and profitability • More likely to promote higher growth rates of loan portfolio than debt investors • Profitability: RoE = RoAx Leverage -> want higher leverage • May look for well developed strategy and metrics for socialimpact • Looking for strategic risk taking • Usually focused on exits within 5-7 years 5

7. Screening MFIs • Relatively few MFIs are suitable for investment. MFIs will generally find it easier to access debt than equity. 6

8. The Investment Process • For debt investments, the process may take roughly 3 months, while equity investments can take 6 months to 1 year or longer 7

9. Tools • Tools that can help companies manage themselves, report, and have coherent discussions with Boards and investors: • Data on comparable MFIs: MiX Data, IRIS • Financial Assessments: MicroRate, Microfinanzas, MCRIL, Planet Rating • Social Assessments: GIIRS, MCRIL, MicroRate,MicroFinanzas, PlaNet • Ratings – S & P, Moodys, Fitch, CRISIL (India) • Self-Assessments – SPTF Universal Standards, SMART Self-Assessment 8

10. Investment Criteria -- Summary • Demonstrable commitment to improvement of clients’ lives. Clearly serve clients that are vulnerable, disenfranchised, and do not have access to basic financial services • Financially viable operations; solid market niche and competitive advantage • Business plan with measurable and realistic social goals, targets, and key performance indicators and the proposed actions to achieve them. • Professional management able to manage risks, assess competitive landscape, and develop, execute and adapt a strategy for achieving financial and social goals 9

11. What MFIs Can Expect • Investors will require monthly or quarterly reporting consistent with industry standards and annual audited financial statements. • Investors will expect to be informed immediately of any significant divergence from plan, any fraud, change in senior management or significant change in regulation. • All investors will look for strong governance: a professional, engaged Board of Directors with a majority of Directors who are independent or represent shareholders. • Loan agreements will typically include performance covenants, which may provide for a loan to come immediately due if, for example, arrears or leverage exceed pre agreed levels. • For equity investments shareholders may require a board seat and quarterly or monthly Board meetings, participation in Board committees, and veto or supermajority approval of key decisions. • Investors will also look for management remuneration that aligns management interests and compensation with shareholder interests. • Investors may look for an MFI to receive “technical assistance” (TA) to address specific weaknesses, like risk management, staff training, SPM. Some investors will help pay for such TA. 10