The Microfinance Insider is a forum for graduate students engaged or interested in working in the field of microfinance. Through weekly posts and comments we hope to inspire students and foster the creation of a knowledge community of bloggers with a commitment to financial access and first hand industry information.

Saturday, August 9, 2008

ASA's venture into Private Equity

I met with ASA’s International division in Dhaka, Bangladesh to learn more about the microfinace institution's entrance into private equity investing. Catalyst Microfinance Investors, ASA's joint venture with Netherlands-based Sequoia recently raised US$150M in capital for an investment fund to make equity only investments in MFIs in Asia and Africa. The US$150M was raised in two rounds, the first was $25M while the second round was $125M. The second round was significiantly oversubscribed and was the largest equity raise ever in microfinance. Investors included socially responsible investors, pension funds, and private investors.

Most prior MFI investment funds have been debt investment-focused, which means they provide loan capital for MFIs and the investment fund receives interest to achieve return on their capital. The MFI is able to use the loan capital to accelerate the growth of the MFI loan portfolio. The MFI borrows from the investment fund at a lower rate than it lends to its microcredit borrower clients.

Private equity investment in MFIs has been challenging for several reasons. Since private equity investments are “private,” the investor cannot simply call a stock broker and sell the equity investment. The lack of exit opportunities is a challenge for private equity investment, with MFI equity positions beings an almost completely illiquid asset. One exit opportunity for an MFI equity investor is an IPO, such as the infamous Compartamos IPO in Mexico last year and others have been completed in countries like Kenya. Another option is to selling the equity position to another private equity investor or large MFI.

Now that we know how difficult it is to exit an MFI equity investment, let's take a step back to understand the challenge of finding an MFI candidate for an equity investment. Catalyst has deployed $10-15M of it its capital. The difficulty is finding an MFI to make a controlling investment in. It may not be challenging to find an MFI willing to sell a 20 or 30% stake to an investor but finding an MFI willing to sell more than 50% to an investor is quite challenging. Many MFIs were started by an individual who continues to retain 100% ownership of the MFI. The MFI owner is usually unwilling to give up control of an organization he or she nurtured for so long to a outside investor.

Catalyst ran into just this issue and decided to take the path of ASA starting MFIs to deploy the US$150M in capital they were flush with. ASA already has the expertise in replication and technical assistance with its ASA International division, very similar to Grameen’s Grameen Trust division. ASA International is starting MFIs that are 100% owned by Catalyst.

Exit options will continue to be a challenge for Catalyst though. The capital markets are expanding in many of the countries ASA is investing but probably not fast enough to be in a mature enough state to have the capacity for an MFI IPO. Similar to traditional private equity funds, Catalyst seeks 20%+ return on its capital and an exit within 5-7 years. One approach is that Catalyst can IPO their entire fund on a developed country stock market as some traditional private equity funds have done.

It is exciting to see ASA as a pioneer in equity investing. ASA continues to execute and expand its microcredit model in a successful efficient manner and it remains to be seen if ASA hopefully executes with the same precision with equity investing.

No comments: