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Microfinance Growing in Attraction to Private-Equity –

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Microfinance Growing in Attraction to Private-Equity

By Isabella Steger, November 18, 2012, 9:38 PM

Bloomberg News
A Hindusthan Microfinance Pvt. Ltd. employee checks loan application forms at the company’s office in Mumbai, India, on Saturday, June 12, 2010.

Amid all the negative news surrounding the private-equity industry, one sector that caters to the poor is drawing interest from these firms: the microfinance industry.

The returns in investing in these companies—which make small loans to entrepreneurs in developing economies—are good, too.

That’s the view of Xavier Pierluca, chief investment officer of Luxembourg-based Bamboo Finance, which manages $250 million in assets and specializes in socially responsible investments globally. The fund just acquired a non-profit, Boston-based Accion Investment Fund, for $105 million in a transaction which the firm says shows the attractiveness of the sector to private capital.

In Asia, Bamboo Finance is currently invested in Xac Bank in Mongolia, which provides microfinancing in as well as lending to small and medium enterprises. The bank began as a non-profit organization but has now grown to become one of the country’s largest banks, said Mr. Pierluca. It also has investments in Kyrgyzstan and India. It is now looking closely at the Philippines, Sri Lanka, and would like to invest in Indonesia. The firm is currently awaiting regulatory approval to open its Singapore office. Mr. Pierluca says microfinance is growing quickly in Asia too because of rapid economic growth in the region, as well as changing regulations as governments start to understand the benefits of microfinance for their economies.

According to Mr. Pierluca, about $72 billion of assets around the world are being invested in microfinance right now, having grown significantly over the last 10 years. He said around four or five large private-equity funds currently invest in microfinance, and he is seeing more interest from those firms, as well as large financial institutions, in the sector.

In 2007, microfinance-related deal volume was below $100 million, growing to between $300 million to $400 million a year, he said, fuelled largely by private-equity activity but also large banks that are looking to acquire microfinance lenders.

Part of the reason, he said, is that some of these institutions, which extend small loans to entrepreneurs in emerging markets, are now accumulating assets of up to $1 billion, making them “relevant for the large private-equity funds.” Many of these institutions have also matured from just making small loans to being full-fledged banks, with the most mature of these being in Latin America.

The returns are also attractive. “We’ve seen a few deals deliver internal rates of return of over 10% or 15% to international investors, even over 20%,” he said. In terms of risks, Mr. Pierluca said the business model of microfinance is highly transparent, facilitated by international organizations with much readily-available information.

The main risk for microfinance businesses is in political interference, he said. For example, in the Indian state of Andhra Pradesh, Mr. Pierluca said the government decided to change the frequency and method of collecting installments on loans to pander to the electorate, making it difficult for lenders to operate, although critics of microfinance also contend that micro lenders in India sometimes charge exorbitant interest rates and use coercive methods to recover debts.

In response, the Indian government introduced a bill in May to regulate the sector, giving powers to the central bank to set the maximum rates that can be charged by micro lenders.

Among Bamboo Finance’s investors, or limited partners, are Dutch pension fund ABP, the government of Abu Dhabi’s Aabar Investments, and other family offices and high net worth individuals.

Allahabad MFI Sonata Finance raises $6.35M from Creation Investments, others

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Chicago-based Creation Investments made its first investment in India in 2010 by picking up stake in Eko India Financial Services.

September, 13, 2012: SONATA Finance Pvt. Ltd., an Allahabad based NBFC Microfinance Institution, announced that it has closed its Series D equity raise of Rs.35 crore. The leading investor in this series was Creation Investments, an alternative investment management company in Chicago. Other investors in this round include The Michael and Susan Dell Foundation and Swaminathan Aiyar, a renowned economist.

SONATA currently operates in four states in India: Uttar Pradesh, Madhya Pradesh, Haryana and Uttaranchal. Despite operating in one of the most underserved and poorest regions in India, SONATA enjoys client confidence and profitable operations with a portfolio of approximately Rs.110 crore.

Anup Kumar Singh, Promoter and Managing Director of SONATA, said, “We welcome the support of like-minded stakeholders like Creation Investments which has endorsed our efforts to ensure quality services to the BoP population.”

This is Creation Investments’ first MFI investment in India. Ken Vander Weele, Chief Investment Officer at Creation Investments said, “We are excited to partner with SONATA for it’s growth. We are long-term partners who will provide them with all the necessary support to achieve their mission.”

With offices in Austin, TX and New Delhi, as well as Cape Town, South Africa, The Michael and Susan Dell Foundation funds programs such as SONATA that improve the economic stability of families living in poverty. SONATA impressed investors at the Dell Family Foundation with their performance during the Indian microfinance crisis.

Representatives at both Creation Investments and the Dell Foundation voiced their support of Indian microfinance. Geeta Goel, Director of Microfinance at The Michael and Susan Dell Foundation said, “Despite the crisis, we have remained committed to the sector and continue to support investees that have retained their focus on being client centric, transparent and financially viable.”

“This transaction validates the fact that there is strong interest in [the] Indian microfinance sector,” said Abhijit Ray, Co-founder and Director of Unitus Capital, the sole financial advisor and arranger to SONATA and its shareholders for the transaction.