Description
The economies of many countries in emerging markets have been experiencing dynamic growth, especially in the past decade. This has led to strong domestic demand for financial services from individuals and micro-, small- and medium-sized enterprises (MSMEs).
Research Insight
Private Equity and Financial Sector Development
in Emerging Markets
Executive Summery
March 2013
Key fndings
?
The rising demand for resources by fnancial institutions serving micro-, small-, and
medium-sized enterprises (MSMEs) presents a unique opportunity for investors eager
to harness the potential of fnancial sector development in emerging markets.
?
Private equity investments in microfnance have long-term fnancial objectives aimed
at enabling successful corporate transformation.
?
The market for investments in microfnance has been growing steadily over recent
years, with institutional and individual investors driving the growth in private funding.
?
Microfnance private equity investments are likely to remain a proftable and
diversifying asset category capable of effecting meaningful impact on fnancial sector
development.
?
Committed investors can play an instrumental role in guiding fnancial institutions
through critical periods of growth and transition; in addition to providing much
needed fnancial resources, they can offer in-depth strategic advice, market expertise,
and operational direction.
Figure 1: Relationship between GDP per capita and use
of fnancial services
Further development of emerging economies’ fnancial sectors
will be an indispensable condition for sustaining their eco-
nomic growth. Financial systems provide vital services: they
evaluate, screen, and allocate capital, monitor the use of that
capital, and facilitate transactions and risk management. Any
enterprise or household excluded from access to fnance is
severely impaired; however this is a reality for over 2.5 billion
individuals in the world.
4
Microfnance plays a vital role in
building more inclusive fnancial markets.
Overcoming fnancial barriers
Previous research has established, theoretically and empiri-
cally, that fnancial market imperfections (informational
asymmetries, high transaction and contract enforcement
costs) are particularly binding on poor or micro entrepreneurs
who lack collateral and credit histories.
5
Without broad access,
such credit constraints make it diffcult for poor households
and small entrepreneurs to fnance high-return investment
projects, reducing the effciency of resource allocation and
having adverse implications for growth and overall develop-
ment. Therefore, it is clear that access to fnance for large
parts of the population is important to expanding opportuni-
ties; in fact, it should be placed on a similar level as having
access to basic needs such as effective health-care services
and education.
Source: Financial Access Initiative, Half the World is Unbanked (2009).
70
60
50
40
30
20
10
0
15,000 20,000
P
e
r
c
e
n
t
a
g
e
o
f
p
o
p
u
l
a
t
i
o
n
u
s
i
n
g
f
n
a
n
c
i
a
l
s
e
r
v
i
c
e
s
10,000 5,000 0
GDP per capita (PPP, 2005)
Nicaragua
Costa Rica
Pakistan
Kenya
India
Argentinia
Thailand
Chile Malaysia
Finance, governance and expertise:
The role of private equity in emerging markets
1
Financial Access Initiative, Half the World Is Unbanked
(2009).
2
Financial Access Initiative, 7.
3
PricewaterhouseCoopers, The World in 2050: The Accelerating
Shift of Global Power (2011).
4
Financial Access Initiative, 1.
5
Demirguc-Kunt, A., Beck T., and Honohan, P, Finance for All?
Policies and Pitfalls in Expanding Access, World Bank Policy
Research Report (2008).
responsAbility – Research Insight 3
The economies of many countries in emerging markets have
been experiencing dynamic growth, especially in the past
decade. This has led to strong domestic demand for fnancial
services from individuals and micro-, small- and medium-sized
enterprises (MSMEs). These developments provide a unique
opportunity for committed fnancial services providers and their
investors to build long-term, sustainable value by harnessing
this market’s potential. Private equity investments in fnancial
institutions serving MSMEs can address fnancial exclusion. It
provides the capital and operational support these institutions
need to broaden their product range and client base; thereby
including more marginalized businesses into the formal fnan-
cial system and empowering low-income households.
The purpose of this Research Insight is to frame the microf-
nance equity investment opportunity and to draw attention
to its role in fnancial sector development within emerging
markets. It highlights the unique opportunities that these
investments present, providing an overview of the dynamic
growth and trends that the sector has experienced in recent
years. It aims to demonstrate that investors can, with the aid
of specialized investment vehicles, assist fnancial institutions
serving MSMEs during their most critical periods of growth
and transition.
Inclusive fnancial sectors sustain economic growth
Growth in per capita income and effective regulatory and
policy environments are two of the most powerful drivers of f-
nancial inclusion, especially when they operate concurrently.
1
As illustrated by fgure 1, the more an economy advances in
terms of per capita income, the greater the need for loans
and fnancial services in general becomes. This dynamic is
substantiated in research published by the Financial Access
Initiative, which has found that a moderate to strong correlation
exists between per capita income and fnancial inclusion.
2
In addition, research published by PricewaterhouseCoopers
suggests that by 2050, the top seven emerging economies
(E7) – represented by China, India, Brazil, Russia, Mexico,
Indonesia and Turkey – may be 25% to 75% larger than the
current seven most developed economies (G7) and that their
fnancial services sectors may undergo correspondingly rapid
expansion.
3
intermediaries (NBFIs) in order to have greater access to public
and private funds (see fgure 3). These emerging fnancial
institutions are seeking signifcant increases in capital in order
to support their expansions and transformations; considerable
fows of equity capital will be needed to secure their prospects
of success.
Figure 3: MFI transformations and fnancial sector development
Private equity investments are critical to advancing
fnancial sector development
Private equity investments in fnancial institutions serving
MSMEs are mainly done in the form of growth or early stage
capital via private placements. They differ from the private
equity strategies employed in the developed world, where busi-
nesses are often streamlined and over-leveraged with the aim
of achieving a return on capital over a short period. Private
equity investments in these fnancial institutions, on the other
hand, have long-term fnancial objectives often aimed at
improving corporate governance and providing operational
support.
As stated in its 2006 report The SME Financing Gap: Theory
and Evidence, the Organization for Economic Cooperation and
Development (OECD) believes that the need for private equity
responsAbility – Research Insight 4
6
MicroRate, The State of Microfnance Investment 2012:
MicroRate’s 7th Annual Survey and Analysis of MIVs
(2012).
Microfnance, understood as the provision of fnancial services
to low-income households and institutions that lack access to
them, has already played a central role in integrating the poor
into the formal fnancial sector. It has provided loans and other
fnancial products (i.e. savings, insurance), as well as business
training and networking opportunities, to economically active
poor people throughout the world. In addition, the microfnance
sector has grown signifcantly over the last decade, reaching
over USD 130 billion in reported assets by microfnance insti-
tutions (MFIs)
6
(see fgure 2), with the private sector acquiring
an increasingly prominent role in mobilizing capital into MFIs.
The private sector’s greater involvement has provided relief from
some of the resource constraints resulting from total reliance
on philanthropic and public sources.
Figure 2: Reported assets of MFIs (USD billion)
Involvement in fnancial institutions serving MSMEs has be-
come an increasingly attractive option. For instance, certain
banks and other fnancial companies have understood that
microfnance can enhance their product mix and bottom line.
They have, as a result, increasingly sought roles as suppliers
of a full range of fnancial services to the poor. Some non-
governmental organizations (NGOs) dedicated to microfnance
have converted into licensed banks and non-bank fnancial
131
140
120
100
80
60
40
20
0
2006 2007 2008 2009 2010 2011* 2012*
31
47
55
67
94
111
*Estimates
Source: MixMarket and MicroRate (2012)
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
N
u
m
b
e
r
o
f
M
F
I
-
T
r
a
n
s
f
o
r
m
a
t
i
o
n
s
Banks Regulated deposit-taking institutions
Regulated non-deposit-taking institutions Non-regulated institutions
Source: responsAbility Research
found that in 2011, cross-border funding for microfnance or
fnancial services to the poor – including grants, guarantees,
debt and equity – amounted to over USD 25 billion in commit-
ments extended over several years. The report analyzed the
composition of this funding and highlighted the following key
developments:
?
Public funding provided around two thirds of the total cross-
border funding commitments, with private funders supplying
the remaining third. While public funds accounted for a
greater share of the total, private funding has been growing
at a much faster rate. Between 2009 and 2011, the
average annualized growth rate of private funders was 12%,
compared to a rate of 3% for the public funders.
?
Institutional and individual investors drove the rapid growth
in private funding, and most of these investments were done
via microfnance investment intermediaries (specialized funds,
microfnance investment vehicles (MIVs) and/or holding
companies are the principal structures used for making this
type of investment).
?
While debt still remains the primary instrument used to fund
microfnance, its share of total commitments decreased from
68% in 2008 to 55% in 2011. On the other hand, equity’s
share of total commitments increased from 9% in 2008
to 13% in 2011.
11
The last decade represented a signifcant growth period for
equity investments in fnancial institutions serving MSMEs. The
following overview of the microfnance private equity market
hopes to underscore the industry’s positive momentum and
bright future.
Trends in microfnance induce surge in equity investments
As indicated in the Global Microfnance Equity Valuation
Survey, published by CGAP and JPMorgan, the microfnance
private equity market experienced strong deal fow in 2011:
it had nearly twice the number of transactions in 2010 and
it registered a 43% increase in capital deployed. Large trans-
responsAbility – Research Insight 5
7
OECD, The SME Financing Gap (2006).
8
Gonzalez, A., Resilience of Microfnance Institutions to
Macroeconomic Events, Microfnance Information Exchange
(2007).
9
Walter, I and Krauss, N., Can Microfnance Reduce
Portfolio Volatility? (2008).
10
The CGAP survey included the participation of 59 micro-
fnance funders ranging from individual donors to public and
private investors.
11
CGAP, Current Trends in Cross-Border Funding for
Microfnance (2012).
is even more urgent in emerging markets than in more mature
economies. In mature economies with strong fnancial mar-
kets, publicly listed companies are often highly responsive to
capital markets as these are driven by institutional investors
that place strong pressure on them to observe rigorous stand-
ards of disclosure. Emerging markets, on the other hand, are
often characterized by companies with concentrated and/or
family ownership, lower levels of transparency, and capital
markets that have less capacity to impose discipline on the
corporate sector. Thus, private equity is often an effective
means of affecting corporate transformation and deepening
fnancial sector development.
7
Further, a report by the Microfnance Information Exchange
indicates that MFIs’ operations tend to be somewhat insulated
from domestic economic downturns;
8
fnancial results have
been largely uncorrelated to traditional asset classes, suggest-
ing that equity investments in these fnancial institutions can
help diversify the sources of risk and return for broad-based
portfolios.
9
As a result of the special opportunities that this type of invest-
ment can provide, equity capital fows into the fnancial insti-
tutions that are serving MSMEs have been increasing for many
years. In addition, both retail and institutional investors are
continuing to show interest in this sector as it promises to
remain a proftable, asset diversifying, and socially responsible
asset category. These increased fows of private equity into
microfnance will not only allow the sector to further expand
and diversify, but also encourage increased transparency and
accountability. As such, this investment opportunity could
be understood as a bridge between two traditional asset
classes – emerging markets and private equity – that promises
a unique blend of returns.
Private funding grows as microfnance extends its reach
A 2012 study by the Consultative Group to Assist the Poor
(CGAP), a World Bank housed microfnance policy and research
group, provides a comprehensive overview of the state of
international funding in microfnance in 2011. The survey
10
actions in Latin America and the Caribbean (LAC) as well as
sizeable deals by Development Finance Institutions (DFIs),
12
especially in India, were largely responsible for this increase in
volume. LAC emerged as the leading region, accounting for
more than half of the investment in private equity, followed by
Asia (see fgure 4). Within these regions, Peru and India were
once again the leading markets, accounting for around 70% of
the total volume of transactions.
Sub-Saharan Africa (SSA) experienced the highest growth in
investments since 2009. Despite starting from a low base in
absolute terms, the volume of investments in SSA has more
than tripled when compared to 2009.
13
Figure 4: Regional share of microfnance equity investments
(USD million)
The strong growth of equity capital into microfnance experi-
enced over the last few years has been underpinned by the
following trends:
?
Increasing Competition. Increasing competition among
fnancial services providers in many developing countries has
stimulated growth, innovation and reductions in product
prices and transaction costs.
?
Downscaling. As competition among commercial banks
has increased, the incentive to grow into new markets by
servicing unattended or under-attended demand segments
has boosted the supply of fnance to low-income households
and MSMEs.
?
Improved Government Policies. Many governments have
improved legislation and regulatory environments for
fnancial institutions. Often, this has resulted in a more
level playing feld, beneftting consumers and forging new
investment opportunities (such as NBFIs being able to
transition into full-fedged retail banks).
?
Mobile Telephony. Mobile phones and new pro-poor
information and communications technology (ICT) have
made individuals and communities accessible to fnancial
institutions with unprecedented speed and reach.
?
Technological Advances. Improvements in, and greater
penetration of, automatic teller machines (ATMs) and other
“point of sale” devices, along with the introduction of smart
plastic cards and new delivery strategies, have helped to
accelerate the extension of branchless banking and services
to clients previously excluded by geographic barriers.
?
Product Clustering. Enhanced ICT has helped MFIs cluster
products around single points of sale and to cross-sell
products and services. For example, once they are on a
fnancial institution’s platform, customers can access
deposit, credit and insurance services, among others.
Compelling investment opportunities in fnancial institutions
serving MSMEs will continue to emerge in response to this
dynamic growth environment. These fnancial institutions’
capital bases and, in some cases, ownership structures, will
have to evolve in order for them to remain competitive and take
advantage of rapid GDP growth. For this reason, further external
resources will be required in order to support expansion strate-
gies, transformations and consolidation plays, as well as
changes of ownership.
350
300
250
200
150
100
50
0
2006 2007 2008 2009 2010 2011
Latin America & Carribean Eastern Europe & Central Asia Asia Africa
Source: CGAP-JP Morgan, Global Microfnance Equity Valuation Survey (2012)
12
DFIs are bilateral or multilateral institutions mandated
by its respective governments to provide long-term fnancing
to the private sector, with specifc value-added development
objectives, but on a sustainable commercial basis. Some
examples are the International Finance Corporation (IFC)
and the Netherlands’ FMO.
13
CGAP-JPMorgan, Volume Growth and Valuation Contraction:
Global Microfnance Equity Valuation Survey (2012).
responsAbility – Research Insight 6
responsAbility – Research Insight 7
Private equity investments in leading fnancial services pro-
viders, whose core business focuses on serving low-income
households and MSMEs in emerging economies, represent an
attractive proposition for investors. An examination of the
following three main developments affecting the microfnance
sector reveals why:
?
Transformation. Different types of enterprises are being
converted into privately owned corporations.
?
Formalization. Entities are evolving into a regulated and
supervised market that includes the deposits business.
?
Consolidation. Opportunities for mergers and acquisitions
are emerging.
These trends are leading to an increase in capital require-
ments that owners are often unable to meet. In addition, larger
equity investments are needed in order to counterbalance
today’s small and fragmented ownership holdings. In fact,
these ineffective ownership and governance structures may
possibly represent one of the principal hindrances to the fnan-
cial institutions’ transformation and advancement. Certain
specialized investment vehicles could permit investors to over-
come these problems by allowing them to play a more active
role, even as minority shareholders. Through strategic equity
investments, investors could, in addition to providing much
needed fnancial resources, assist the fnancial institution
with operational support. By offering in-depth strategic advice,
market expertise and operational guidance, they can help
guide the growing fnancial institution through pivotal points
of transition. Investors can look to specialized investment
vehicles – those with extensive industry experience and long-
term ownership horizons – and take the opportunity to combine
an attractive return profle with a meaningful impact on fnancial
sector development.
Investment opportunities
Ordering
Research papers of responsAbility can be ordered through your
Relationship Manager, or by e-mail to [email protected]
or phone at +41 44 254 32 74. For further information please
visit www.responsAbility.com.
About responsAbility
responsAbility is one of the world’s leading independent
asset managers specializing in the development-related
sectors of emerging economies such as fnance, agriculture,
health, education and energy. responsAbility provides debt
and equity fnancing to non-listed companies with business
models that target the lower-income segment of the popu-
lation and can thus drive economic growth and social
progress. Serving both institutional and private investors,
responsAbility offers professionally-managed investment
solutions ranging from mutual funds to individual mandates.
Henry González
Head Research
[email protected]
+41 44 250 99 35
Contact
This document was produced by responsAbility Social Investments AG (hereinafter “responsAbility”). The information contained in this document (hereinafter “information”) is based on sources consi-
dered to be reliable, but its accuracy and completeness is not guaranteed. The information is subject to change at any time and without obligation to notify the recipient. Unless otherwise indicated, all
fgures are unaudited and are not guaranteed. Any action derived from this information is always at the recipient’s own risk. This document is for information purposes only. The information does not
release the recipient from making his/her own assessment.
This document may be cited if the source is indicated.
Picture credits: age fotostock
© 2013 responsAbility Social Investments AG. All rights reserved.
responsAbility Social Investments AG
Josefstrasse 59, 8005 Zurich, Switzerland
Phone +41 44 250 99 30, Fax +41 44 250 99 31
www.responsAbility.com
doc_307316830.pdf
The economies of many countries in emerging markets have been experiencing dynamic growth, especially in the past decade. This has led to strong domestic demand for financial services from individuals and micro-, small- and medium-sized enterprises (MSMEs).
Research Insight
Private Equity and Financial Sector Development
in Emerging Markets
Executive Summery
March 2013
Key fndings
?
The rising demand for resources by fnancial institutions serving micro-, small-, and
medium-sized enterprises (MSMEs) presents a unique opportunity for investors eager
to harness the potential of fnancial sector development in emerging markets.
?
Private equity investments in microfnance have long-term fnancial objectives aimed
at enabling successful corporate transformation.
?
The market for investments in microfnance has been growing steadily over recent
years, with institutional and individual investors driving the growth in private funding.
?
Microfnance private equity investments are likely to remain a proftable and
diversifying asset category capable of effecting meaningful impact on fnancial sector
development.
?
Committed investors can play an instrumental role in guiding fnancial institutions
through critical periods of growth and transition; in addition to providing much
needed fnancial resources, they can offer in-depth strategic advice, market expertise,
and operational direction.
Figure 1: Relationship between GDP per capita and use
of fnancial services
Further development of emerging economies’ fnancial sectors
will be an indispensable condition for sustaining their eco-
nomic growth. Financial systems provide vital services: they
evaluate, screen, and allocate capital, monitor the use of that
capital, and facilitate transactions and risk management. Any
enterprise or household excluded from access to fnance is
severely impaired; however this is a reality for over 2.5 billion
individuals in the world.
4
Microfnance plays a vital role in
building more inclusive fnancial markets.
Overcoming fnancial barriers
Previous research has established, theoretically and empiri-
cally, that fnancial market imperfections (informational
asymmetries, high transaction and contract enforcement
costs) are particularly binding on poor or micro entrepreneurs
who lack collateral and credit histories.
5
Without broad access,
such credit constraints make it diffcult for poor households
and small entrepreneurs to fnance high-return investment
projects, reducing the effciency of resource allocation and
having adverse implications for growth and overall develop-
ment. Therefore, it is clear that access to fnance for large
parts of the population is important to expanding opportuni-
ties; in fact, it should be placed on a similar level as having
access to basic needs such as effective health-care services
and education.
Source: Financial Access Initiative, Half the World is Unbanked (2009).
70
60
50
40
30
20
10
0
15,000 20,000
P
e
r
c
e
n
t
a
g
e
o
f
p
o
p
u
l
a
t
i
o
n
u
s
i
n
g
f
n
a
n
c
i
a
l
s
e
r
v
i
c
e
s
10,000 5,000 0
GDP per capita (PPP, 2005)
Nicaragua
Costa Rica
Pakistan
Kenya
India
Argentinia
Thailand
Chile Malaysia
Finance, governance and expertise:
The role of private equity in emerging markets
1
Financial Access Initiative, Half the World Is Unbanked
(2009).
2
Financial Access Initiative, 7.
3
PricewaterhouseCoopers, The World in 2050: The Accelerating
Shift of Global Power (2011).
4
Financial Access Initiative, 1.
5
Demirguc-Kunt, A., Beck T., and Honohan, P, Finance for All?
Policies and Pitfalls in Expanding Access, World Bank Policy
Research Report (2008).
responsAbility – Research Insight 3
The economies of many countries in emerging markets have
been experiencing dynamic growth, especially in the past
decade. This has led to strong domestic demand for fnancial
services from individuals and micro-, small- and medium-sized
enterprises (MSMEs). These developments provide a unique
opportunity for committed fnancial services providers and their
investors to build long-term, sustainable value by harnessing
this market’s potential. Private equity investments in fnancial
institutions serving MSMEs can address fnancial exclusion. It
provides the capital and operational support these institutions
need to broaden their product range and client base; thereby
including more marginalized businesses into the formal fnan-
cial system and empowering low-income households.
The purpose of this Research Insight is to frame the microf-
nance equity investment opportunity and to draw attention
to its role in fnancial sector development within emerging
markets. It highlights the unique opportunities that these
investments present, providing an overview of the dynamic
growth and trends that the sector has experienced in recent
years. It aims to demonstrate that investors can, with the aid
of specialized investment vehicles, assist fnancial institutions
serving MSMEs during their most critical periods of growth
and transition.
Inclusive fnancial sectors sustain economic growth
Growth in per capita income and effective regulatory and
policy environments are two of the most powerful drivers of f-
nancial inclusion, especially when they operate concurrently.
1
As illustrated by fgure 1, the more an economy advances in
terms of per capita income, the greater the need for loans
and fnancial services in general becomes. This dynamic is
substantiated in research published by the Financial Access
Initiative, which has found that a moderate to strong correlation
exists between per capita income and fnancial inclusion.
2
In addition, research published by PricewaterhouseCoopers
suggests that by 2050, the top seven emerging economies
(E7) – represented by China, India, Brazil, Russia, Mexico,
Indonesia and Turkey – may be 25% to 75% larger than the
current seven most developed economies (G7) and that their
fnancial services sectors may undergo correspondingly rapid
expansion.
3
intermediaries (NBFIs) in order to have greater access to public
and private funds (see fgure 3). These emerging fnancial
institutions are seeking signifcant increases in capital in order
to support their expansions and transformations; considerable
fows of equity capital will be needed to secure their prospects
of success.
Figure 3: MFI transformations and fnancial sector development
Private equity investments are critical to advancing
fnancial sector development
Private equity investments in fnancial institutions serving
MSMEs are mainly done in the form of growth or early stage
capital via private placements. They differ from the private
equity strategies employed in the developed world, where busi-
nesses are often streamlined and over-leveraged with the aim
of achieving a return on capital over a short period. Private
equity investments in these fnancial institutions, on the other
hand, have long-term fnancial objectives often aimed at
improving corporate governance and providing operational
support.
As stated in its 2006 report The SME Financing Gap: Theory
and Evidence, the Organization for Economic Cooperation and
Development (OECD) believes that the need for private equity
responsAbility – Research Insight 4
6
MicroRate, The State of Microfnance Investment 2012:
MicroRate’s 7th Annual Survey and Analysis of MIVs
(2012).
Microfnance, understood as the provision of fnancial services
to low-income households and institutions that lack access to
them, has already played a central role in integrating the poor
into the formal fnancial sector. It has provided loans and other
fnancial products (i.e. savings, insurance), as well as business
training and networking opportunities, to economically active
poor people throughout the world. In addition, the microfnance
sector has grown signifcantly over the last decade, reaching
over USD 130 billion in reported assets by microfnance insti-
tutions (MFIs)
6
(see fgure 2), with the private sector acquiring
an increasingly prominent role in mobilizing capital into MFIs.
The private sector’s greater involvement has provided relief from
some of the resource constraints resulting from total reliance
on philanthropic and public sources.
Figure 2: Reported assets of MFIs (USD billion)
Involvement in fnancial institutions serving MSMEs has be-
come an increasingly attractive option. For instance, certain
banks and other fnancial companies have understood that
microfnance can enhance their product mix and bottom line.
They have, as a result, increasingly sought roles as suppliers
of a full range of fnancial services to the poor. Some non-
governmental organizations (NGOs) dedicated to microfnance
have converted into licensed banks and non-bank fnancial
131
140
120
100
80
60
40
20
0
2006 2007 2008 2009 2010 2011* 2012*
31
47
55
67
94
111
*Estimates
Source: MixMarket and MicroRate (2012)
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
N
u
m
b
e
r
o
f
M
F
I
-
T
r
a
n
s
f
o
r
m
a
t
i
o
n
s
Banks Regulated deposit-taking institutions
Regulated non-deposit-taking institutions Non-regulated institutions
Source: responsAbility Research
found that in 2011, cross-border funding for microfnance or
fnancial services to the poor – including grants, guarantees,
debt and equity – amounted to over USD 25 billion in commit-
ments extended over several years. The report analyzed the
composition of this funding and highlighted the following key
developments:
?
Public funding provided around two thirds of the total cross-
border funding commitments, with private funders supplying
the remaining third. While public funds accounted for a
greater share of the total, private funding has been growing
at a much faster rate. Between 2009 and 2011, the
average annualized growth rate of private funders was 12%,
compared to a rate of 3% for the public funders.
?
Institutional and individual investors drove the rapid growth
in private funding, and most of these investments were done
via microfnance investment intermediaries (specialized funds,
microfnance investment vehicles (MIVs) and/or holding
companies are the principal structures used for making this
type of investment).
?
While debt still remains the primary instrument used to fund
microfnance, its share of total commitments decreased from
68% in 2008 to 55% in 2011. On the other hand, equity’s
share of total commitments increased from 9% in 2008
to 13% in 2011.
11
The last decade represented a signifcant growth period for
equity investments in fnancial institutions serving MSMEs. The
following overview of the microfnance private equity market
hopes to underscore the industry’s positive momentum and
bright future.
Trends in microfnance induce surge in equity investments
As indicated in the Global Microfnance Equity Valuation
Survey, published by CGAP and JPMorgan, the microfnance
private equity market experienced strong deal fow in 2011:
it had nearly twice the number of transactions in 2010 and
it registered a 43% increase in capital deployed. Large trans-
responsAbility – Research Insight 5
7
OECD, The SME Financing Gap (2006).
8
Gonzalez, A., Resilience of Microfnance Institutions to
Macroeconomic Events, Microfnance Information Exchange
(2007).
9
Walter, I and Krauss, N., Can Microfnance Reduce
Portfolio Volatility? (2008).
10
The CGAP survey included the participation of 59 micro-
fnance funders ranging from individual donors to public and
private investors.
11
CGAP, Current Trends in Cross-Border Funding for
Microfnance (2012).
is even more urgent in emerging markets than in more mature
economies. In mature economies with strong fnancial mar-
kets, publicly listed companies are often highly responsive to
capital markets as these are driven by institutional investors
that place strong pressure on them to observe rigorous stand-
ards of disclosure. Emerging markets, on the other hand, are
often characterized by companies with concentrated and/or
family ownership, lower levels of transparency, and capital
markets that have less capacity to impose discipline on the
corporate sector. Thus, private equity is often an effective
means of affecting corporate transformation and deepening
fnancial sector development.
7
Further, a report by the Microfnance Information Exchange
indicates that MFIs’ operations tend to be somewhat insulated
from domestic economic downturns;
8
fnancial results have
been largely uncorrelated to traditional asset classes, suggest-
ing that equity investments in these fnancial institutions can
help diversify the sources of risk and return for broad-based
portfolios.
9
As a result of the special opportunities that this type of invest-
ment can provide, equity capital fows into the fnancial insti-
tutions that are serving MSMEs have been increasing for many
years. In addition, both retail and institutional investors are
continuing to show interest in this sector as it promises to
remain a proftable, asset diversifying, and socially responsible
asset category. These increased fows of private equity into
microfnance will not only allow the sector to further expand
and diversify, but also encourage increased transparency and
accountability. As such, this investment opportunity could
be understood as a bridge between two traditional asset
classes – emerging markets and private equity – that promises
a unique blend of returns.
Private funding grows as microfnance extends its reach
A 2012 study by the Consultative Group to Assist the Poor
(CGAP), a World Bank housed microfnance policy and research
group, provides a comprehensive overview of the state of
international funding in microfnance in 2011. The survey
10
actions in Latin America and the Caribbean (LAC) as well as
sizeable deals by Development Finance Institutions (DFIs),
12
especially in India, were largely responsible for this increase in
volume. LAC emerged as the leading region, accounting for
more than half of the investment in private equity, followed by
Asia (see fgure 4). Within these regions, Peru and India were
once again the leading markets, accounting for around 70% of
the total volume of transactions.
Sub-Saharan Africa (SSA) experienced the highest growth in
investments since 2009. Despite starting from a low base in
absolute terms, the volume of investments in SSA has more
than tripled when compared to 2009.
13
Figure 4: Regional share of microfnance equity investments
(USD million)
The strong growth of equity capital into microfnance experi-
enced over the last few years has been underpinned by the
following trends:
?
Increasing Competition. Increasing competition among
fnancial services providers in many developing countries has
stimulated growth, innovation and reductions in product
prices and transaction costs.
?
Downscaling. As competition among commercial banks
has increased, the incentive to grow into new markets by
servicing unattended or under-attended demand segments
has boosted the supply of fnance to low-income households
and MSMEs.
?
Improved Government Policies. Many governments have
improved legislation and regulatory environments for
fnancial institutions. Often, this has resulted in a more
level playing feld, beneftting consumers and forging new
investment opportunities (such as NBFIs being able to
transition into full-fedged retail banks).
?
Mobile Telephony. Mobile phones and new pro-poor
information and communications technology (ICT) have
made individuals and communities accessible to fnancial
institutions with unprecedented speed and reach.
?
Technological Advances. Improvements in, and greater
penetration of, automatic teller machines (ATMs) and other
“point of sale” devices, along with the introduction of smart
plastic cards and new delivery strategies, have helped to
accelerate the extension of branchless banking and services
to clients previously excluded by geographic barriers.
?
Product Clustering. Enhanced ICT has helped MFIs cluster
products around single points of sale and to cross-sell
products and services. For example, once they are on a
fnancial institution’s platform, customers can access
deposit, credit and insurance services, among others.
Compelling investment opportunities in fnancial institutions
serving MSMEs will continue to emerge in response to this
dynamic growth environment. These fnancial institutions’
capital bases and, in some cases, ownership structures, will
have to evolve in order for them to remain competitive and take
advantage of rapid GDP growth. For this reason, further external
resources will be required in order to support expansion strate-
gies, transformations and consolidation plays, as well as
changes of ownership.
350
300
250
200
150
100
50
0
2006 2007 2008 2009 2010 2011
Latin America & Carribean Eastern Europe & Central Asia Asia Africa
Source: CGAP-JP Morgan, Global Microfnance Equity Valuation Survey (2012)
12
DFIs are bilateral or multilateral institutions mandated
by its respective governments to provide long-term fnancing
to the private sector, with specifc value-added development
objectives, but on a sustainable commercial basis. Some
examples are the International Finance Corporation (IFC)
and the Netherlands’ FMO.
13
CGAP-JPMorgan, Volume Growth and Valuation Contraction:
Global Microfnance Equity Valuation Survey (2012).
responsAbility – Research Insight 6
responsAbility – Research Insight 7
Private equity investments in leading fnancial services pro-
viders, whose core business focuses on serving low-income
households and MSMEs in emerging economies, represent an
attractive proposition for investors. An examination of the
following three main developments affecting the microfnance
sector reveals why:
?
Transformation. Different types of enterprises are being
converted into privately owned corporations.
?
Formalization. Entities are evolving into a regulated and
supervised market that includes the deposits business.
?
Consolidation. Opportunities for mergers and acquisitions
are emerging.
These trends are leading to an increase in capital require-
ments that owners are often unable to meet. In addition, larger
equity investments are needed in order to counterbalance
today’s small and fragmented ownership holdings. In fact,
these ineffective ownership and governance structures may
possibly represent one of the principal hindrances to the fnan-
cial institutions’ transformation and advancement. Certain
specialized investment vehicles could permit investors to over-
come these problems by allowing them to play a more active
role, even as minority shareholders. Through strategic equity
investments, investors could, in addition to providing much
needed fnancial resources, assist the fnancial institution
with operational support. By offering in-depth strategic advice,
market expertise and operational guidance, they can help
guide the growing fnancial institution through pivotal points
of transition. Investors can look to specialized investment
vehicles – those with extensive industry experience and long-
term ownership horizons – and take the opportunity to combine
an attractive return profle with a meaningful impact on fnancial
sector development.
Investment opportunities
Ordering
Research papers of responsAbility can be ordered through your
Relationship Manager, or by e-mail to [email protected]
or phone at +41 44 254 32 74. For further information please
visit www.responsAbility.com.
About responsAbility
responsAbility is one of the world’s leading independent
asset managers specializing in the development-related
sectors of emerging economies such as fnance, agriculture,
health, education and energy. responsAbility provides debt
and equity fnancing to non-listed companies with business
models that target the lower-income segment of the popu-
lation and can thus drive economic growth and social
progress. Serving both institutional and private investors,
responsAbility offers professionally-managed investment
solutions ranging from mutual funds to individual mandates.
Henry González
Head Research
[email protected]
+41 44 250 99 35
Contact
This document was produced by responsAbility Social Investments AG (hereinafter “responsAbility”). The information contained in this document (hereinafter “information”) is based on sources consi-
dered to be reliable, but its accuracy and completeness is not guaranteed. The information is subject to change at any time and without obligation to notify the recipient. Unless otherwise indicated, all
fgures are unaudited and are not guaranteed. Any action derived from this information is always at the recipient’s own risk. This document is for information purposes only. The information does not
release the recipient from making his/her own assessment.
This document may be cited if the source is indicated.
Picture credits: age fotostock
© 2013 responsAbility Social Investments AG. All rights reserved.
responsAbility Social Investments AG
Josefstrasse 59, 8005 Zurich, Switzerland
Phone +41 44 250 99 30, Fax +41 44 250 99 31
www.responsAbility.com
doc_307316830.pdf