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Microfinance Growing in Attraction to Private-Equity – WSJ.com

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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.

Sequoia Capital bets on another microfinance player

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Bangalore Feb 02, 2012

After backing SKS Microfinance, Sequoia Capital is now betting on another microfinance player, Bangalore-based urban poor-focused Ujjivan Financial Services, a member of the Grameen Network, Bangladesh. Sequoia Capital on Wednesday said it had participated in the fifth round of equity financing by Ujjivan, and was now the single-largest shareholder, with a stake of around 15.7 per cent.

It added it had raised Rs 127.9 crore ($25.5 million). Two new foreign institutional investors (FIIs), FMO (Netherlands Development Finance Company) and WCP Mauritius Holdings III (Wolfensohn Capital Partners), along with current investors, participated in this round. The existing investors are Lok Capital, Unitus Corporation, Elevar Equity, Caspian Advisors, besides Sequoia. With the latest round of fund raising, private equity funds have invested a total of Rs 230 crore and hold 83 per cent in the company. The promoters group, led by Samit Ghosh, managing director, Ujjivan, hold around four per cent and has so far disbursed Rs 2,800 crore.

Mohit Bhatnagar, managing director, Sequoia Capital, said India continued to be a preferred investment destination for FIIs and it was heartening to see fundamentally strong organisations in the microfinance sector were a key focus. Samit Ghosh said, “We thank our existing investors who continue to reiterate their commitment to us and welcome our two new investors. This round of equity funding will make Ujjivan one of the best capitalised MFIs in the country”. With this round of equity funding, the last being in 2009, Ujjivan’s capitalisation has more than doubled to Rs 230 crore. Kotak Investment Banking was the advisor and arranger of the transaction.

 

Sanjiv Kapur, managing director, Wolfensohn India Advisors Pvt Ltd, said, “This is the first investment for Wolfensohn in the Indian microfinance sector, endorsing our faith in the sector and in Ujjivan’s financial inclusion model.” Sudha Suresh, Ujjivan’s chief financial officer said the additional capital would help increase the loan book from the current Rs 600 crore to around Rs 1,600 crore, given the Reserve Bank of India’s 15 per cent capital adequacy requirement for MFIs that are non-banking financial companies.

“We are very happy to work with Ujjivan, which is constantly searching for ways to better serve the urban poor. Their firm focus on their mission to alleviate poverty and strong business credentials make Ujjivan a very interesting partner for FMO” said Keesjan de Kruijf, senior investment officer, FMO.

“When we look for large MFIs which are truly client centric, transparent, have good systems, great leadership, and are sincere in its social objectives, Ujjivan is the only MFI which comes to our minda. Our investment is built around making it the borrower of choice for the base of the pyramid, across the country”, said Venky Natarajan, managing partner, Lok Capital.

Ujjivan serves over a million clients in 20 states and 49 under-banked districts across the country.

Recently, Ujjivan received the ‘Microfinance Organisation of the Year’ award and was ranked No1 in the microfinance industry as the best company to work for in India.