What makes a ticket hot? Novelty and publicity are two essential ingredients, but real incandescence only comes with scarcity.
When a United Nations “Year of Microfinance” in 2005 was followed in 2006 by the award of the Nobel Peace Prize to the Grameen Bank and its founder, Dr. Muhammed Yunus, the world got to know about the supposedly esoteric business of providing financial services to the poor. By the time Mexican microfinance bank Compartamos came to the market with the sector’s first IPO in April, the white heat of interest in the offering caused a 13-times over-subscription for the 30% of the bank on offer–and created the first microfinance millionaires.
When there are 1.5 billion potential microfinance customers to serve, when existing microfinance institutions (MFIs) are growing their portfolios at annual rates of 30% or more and new MFIs are springing up every day, why are the opportunities to own a piece of the action so scarce?
The first reason is lack of information. It’s a strange truth about an asset class that’s had so much publicity. Although there are a number of private-equity funds out there, it’s not all that easy to find them. True, information about these funds is available on microfinance site MixMarket.org. But a real change for the better should come with the imminent launch of the International Association of Microfinance Investors (IAMFI), which will specifically target the “limited partner” universe. It will offer clear and solid data to its members. This data will include not just the investments that are available, but also, over time, common metrics to evaluate the performance of funds.
Another reason microfinance opportunities seem scarce is that there is almost no liquidity in microfinance investments. Few are listed (and none on any major stock exchange) and very few private stakes ever change hands. The ownership of MFIs is often a mix of equity and donor capital–development agencies, for example–thereby making fair treatment of all parties on exit difficult.
Similarly, the motives of early-stage shareholders are often completely different. It is very common to find shareholders driven entirely by the “mission” of serving the poor, alongside shareholders with a purely commercial interest in microfinance. These differing agendas can lead to paralysis in terms of optimizing the MFIs’ capital structure.
Also, key shareholders, such as the International Financial Institutions, are often reluctant to free up stakes. Many argue that these shareholders should be selling their stakes, thereby opening up the market to new microfinance institutions and territories.
For a fully commercial investment, the easiest option is probably to buy into one of the private-equity funds or funds-of-funds, which can be found on MixMarket.org. Yet most are new and still in the ramp-up phase, so there is little prospect of early exits or returns.
Looking for stakes in individual microfinance institutions requires some unusual considerations above and beyond the standard risks associated with investing in emerging markets, like currency volatility and political risk. There will, for example, be questions about “mission.” Is this institution driven purely by profit or by some more socially responsible motive of service to the poor? The latter can take many forms, from lending at effectively subsidized rates to what in industry parlance is often referred to as “microfinance plus.” (The “plus” can refer to health and education programs, for example.) But the underlying idea is that finance alone doesn’t create the development effects that truly lift people out of poverty. Needless to say, evaluating such fungible definitions can be difficult.
Also worth noting is that many MFIs start life as not-for-profits, and are often seeded by donor money from aid agencies. Many of these MFIs have transformed to for-profit structures, meaning that donor money could be sitting alongside a variety of quasi-equity instruments (such as convertible debt) as well as common stock. Valuing all this is an art form, with few comparables available to inform either book multiple or cash-flow valuation models. Unfortunately, the industry’s sole mega-deal, Mexico’s Compartamos IPO, with its 13-times book valuation, probably hasn’t helped, as it’s given some MFI owners a somewhat inflated sense of their own stock’s worth.