Microfinance Investing:

Leveraging Capital for Financial and Social Returns

Joan TrantTake Action! Summit

October 5-7, 2009

Discussion Points

• Microfinance Demand

• Investment Landscape

• The Business and Social Case for Commercialization

• Appendix: IAMFI Overview

Microfinance Funding Demand

• Total population living under $2/day: 2.7 billion

• Total current microfinance customers: 100 million

• Total estimated potential customers: 1.5 billion

• Total estimated microfinance loans outstanding: $35 billion

• Estimated funding gap: $265 billion

Microfinance Investments $10.1 billion as of 12/08 by primarily cross border funders

• Development Finance Institutions (DFIs): $4.9B• Private Institutional: $2.9B• Retail: $2.2B

Instruments• Fixed Income: 77%• Equity: 21%, but growing….- 11 new funds launched in 2008; all were equity or equity + debt- MF equity investment 2004-08: $2.2B to $7.6B

$6.1B funding channeled via 106 microfinance investment vehicles

Source: CGAP and IAMFI

Microfinance Investment: Sample Returns

Equity returns • CGAP – J.P. Morgan Equity survey (Jan. 05 – Sept. 08):

1.3 - 1.9x book value

• Recent equity sales of Mongolian bank shares:• two exits in late 05 - early 06: 1.2x book• one exit in 2007: 1.5x • one exit in 2008: 2.5x• one exit in 2009: 2.5x

• ROE returns range from 12-23% (higher in India)

Debt returns range from 2-13%

Microfinance InvestorsInstitutional investors:

• Government-owned DFIs• Corporations (banks, insurance companies)• Pension funds• Endowments• Private equity and hedge funds• Foundations• Family Offices

Individual Investors

• High net worth• Retail

• Non-standardized information, self-reported and collected by diverse sources

• Most information focused on microfinance institutions’ (MFIs) and donors’ needs

• Lack of transparency, deal standardization, consensus on best practices

Microfinance Investment Environment: Why Invest Given Significant Hurdles?

Microfinance Investment Environment: Why Invest Given Significant Hurdles?

• Fewer investor services compared to more established asset classes (credit ratings, secondary market, fund rankings)

• Many MFIs seek commercial capital, but only about 250 are investor-ready

• The industry must address both the demand for funding by the unbanked and the limited absorptive capacity of the MFIs

MFIs exhibit attractive business attributes:

– Loyal client base means lower acquisition and operation costs

– Interest rates are high to cover hefty operational expenses

– Microborrower loan repayment rates are 95-98%

– ROE average around 19%

– Short-term loans contribute to high solvency and liquidity

The Business Case for Microfinance Investment

• High growth sector with huge market demand –MF penetration in 8 largest countries is below 5%, with 15x growth factor

• Microfinance offers emerging market diversification and low correlation – good for reducing investment volatility

• Microfinance helps investors align their investments with their values in an active way, not just through passive screening

The Business Case for Microfinance Investment, cont.

• Expand outreach to more unbanked borrowers

• Replace shrinking donor contributions

• Improve capital structure

• Increase range of products for clients: savings, insurance, remittances, specialized loans for education and housing

• Founding nonprofit lending institutions may use profits to fund services for the most vulnerable

The Business Case for MFIs to Commercialize

• Donor funding is never sufficient to meet human development needs

• MFI transformation and commercialization facilitate client savings

• Savings provide an inexpensive, stable source of capital for MFIs

• Savings products offer clients safety and liquidity

• Savings - not loans - alleviate poverty

The Business and Social Case for Microfinance Investment

• Financial and social returns are linked and mutually reinforcing

• Strong financial performance improves institutional capacity to serve the target population

• Strong social performance improves customer loyalty, referrals and repayment rates, lowering costs and risks

• Commercialization should not be viewed as an inverse proxy for development impact

• Investors may select investment partners based on desired level of social performance focus

The Business and Social Case for Microfinance Investment

Microfinance presents an attractive opportunity for impact investors with:

• Global focus

• High tolerance for illiquid assets

• Long-term investment horizon

• Acceptance of the assets’ risk profile

• Leniency regarding short industry track record

Leveraging Capital for Financial and Social Returns - Conclusion

Appendix: About IAMFI

IAMFI is a global membership organization dedicated to helping commercially oriented microfinance investors, particularly Limited Partner institutional investors that invest through MIVs, to leverage their capital more effectively. IAMFI’s services include:

• Providing credible, comprehensive and timely information on the microfinance industry from an independent perspective

• Conducting research on investment-related topics

• Hosting virtual and in-person educational and networking events

• Facilitating dialogue and action among all sector participants to improve the investing environment

IAMFI’s Members

Limited Partners (LPs): Active and potential investors who invest in an investment vehicle rather than investing directly in microfinance institutions.

General Partners (GPs): Public and private entities that manage a fund or investment vehicle in which there are many investors.

Service Providers (SPs): Entities that help advise, structure, consult or broker investments in the microfinance industry.

IAMFI’s Members, cont.Founding MembersDOEN Foundation Plainfield Asset ManagementOmidyar Network Rockefeller FoundationGray Matters Capital Triodos ManagementTIAA-CREF

Charter MembersBlueOrchard Finance USA, G. Casagrande (SPBD, MicroDreams),Co-operative for Financial Services, Grassroots Capital Management, J.P. Morgan, MEDA, MicroCredit Enterprises, MicroVest, Minlam Asset Management, Morgan Stanley, Norwegian Microfinance Initiative, Omidyar-Tufts Microfinance Fund, Triple Jump, two individuals

IAMFI’s Services

Information Portal• Robust web site with third-party information and data about

microfinance and microfinance investing• Reviewed for relevance and accuracy so that investors may

evaluate information more efficiently• Password-protected “Members Only” section

Research• White papers, Position papers• Studies on debt, equity, GP and LP investor checklists

IAMFI’s Services, cont.

Education, Conferences and Events• Hosted and co-hosted international conferences on

microfinance investing • Issue-specific events and seminars for special interest groups

within the Association’s membership

Community• Forum for members to discuss interests, goals and concerns• Vehicle for dialogue, consensus-building and action among

all sector actors, e.g. IAMFI Microfinance Lenders Working Group

• Integrity • Transparency• Independence• Sustainability• Action orientation• Inclusion• Value creation• Collaboration

IAMFI’s Values

The International Association of Microfinance Investors (IAMFI) is a global membership organization dedicated to serving current and potential market-driven microfinance investors, especially those who invest

in funds and other vehicles.

IAMFI helps investors achieve their goals by offering credible, objective industry information, conducting research, organizing educational

and networking activities, and working to improve the global environmentfor microfinance.

The association seeks to promote the virtuous circle of capital flows between private sector sources, investment vehicles and microfinance institutions, enabling greater access to financial services for the world’s working poor.

For more details, contact Joan Trant, jtrant@iamfi.com, +1.212.297.2137.