byu - 3/15/03 incorporating microfinance institutions into capital markets drew tulchin social...
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BYU - 3/15/03
Incorporating Microfinance Institutions into Capital Markets
Drew Tulchin
Social Enterprise AssociatesBYU, 6th Conference on Microenterprise
March, 2003
If it talks like a duck, walks like a duck & looks like a duck, it is more readily treated like a duck
BYU - 3/15/03
Incorporating Microfinance Institutions into Capital
Markets• Introduction• Understanding the Duck• Talking like a Duck• Walking like a Duck• Looking like a Duck• Duck Examples - Microfinance
& the Capital Markets• Q & A
BYU - 3/15/03
Introduction
Drew TulchinSocial Enterprise
AssociatesA network of professionals making communities better by applying business skills &
sustainable practices.
Who are you? What brought you here today?
Who am I?
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Definitions & Assumptions
• Terminology– MFI = Microfinance Institution– Define Microfinance, Micro-credit, Micro-debt, etc.
• Microfinance in Development– Microfinance is NOT a universal development panacea– MFIs have proven the model & shown profitability – The promise of microfinance as a sustainable effective
development tool is still unrealized
• Microfinance Moving Forward– The industry’s next decade will be one of extensive
change – ‘failures’ & consolidations– Profit is NOT a dirty word
BYU - 3/15/03
Incorporating Microfinance Institutions into Capital
MarketsIf it talks like a duck, walks like a duck & looks like a duck,then it can be more readily treated like aduck with regards to accessing capital markets.
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PICTURE
Est. MFI Portfolio Annual Asset
Turnover
$4 B
Est. Total Customer Need / Demand$300
B
Where is this money going to come from?
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Understanding the Duck
BYU - 3/15/03
Understanding the Duck
99% of MFIs are funded by donorsDONORS give money
MFIs experienced (& good at) pitching them
Current model: 5 years as NGO w/ donations, 2 years to transform into commercial bank
What happens when donors go away?
Where does $$$ come from for MFIs?
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Understanding the Duck
INVESTORS make investmentsMFIs less experienced (& good at) pitching them
Investors vary: individuals, socially responsible investors (‘SRI’), institutions (‘The Street’)
What happens when MFIs don’t perform?
Where does $$$ come from for Capital Markets?
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Understanding the Duck
INVESTMENTS produce returnMFIs face results oversight, potential mission drift
Investments are easiest when:– Industry is known; vehicle is understood – Viable exit strategy– Risk factors are known, identified & measured– Comparable to other investments– Have a track record / history
What happens when MFIs cannot compete?
What do investors expect from capital markets?
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PICTURE
ANNUAL giving of all US Foundations
(2000)
$5 B
DAILY transactions on Wall Street (2000)$1
T
Which pot of money would you rather be drawing from?
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Talking like a Duck
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Talking Like a Duck
Language – Is a communication tool– Is an indicator of behavior
MFIs & Investors – Do not speak the same language– Do not use the same vocabulary
Investors expect to hear their language & their vocabulary
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Talking Like a Duck
MFI LanguageInvestor
Language
Clients Customers
Outreach Marketing
Sustainability Profitability
Language for donors w/ a social motive
Language of returns w/ a financial motive
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PICTURE
Number of
‘Counted’ MFIs
1%
% financially self-sufficient, (a.k.a. profitable)10,00
0
Which group would you prefer to belong to?
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Walking like a Duck
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Walking Like a Duck
MFI Characteristics When Seeking Investment• Non-Profit Organization (NGO)• Mission driven
– promote need for service to help impoverished people
• ‘Informal’ • Metrics of success
# of loans made jobs created# people helped loan size
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Walking Like a Duck
Investment Barriers for MFI Characteristics• Are NGOs known for professionalism, as investment option?
(There are exceptions: public housing, CDFIs, LISC, etc.)
• Is there accountability, reporting, strong systems?
• Who ‘owns’ the entity? The Board of Directors?
• Given the social mission, is management prudent, financial management practiced & are risks assessed?
• Do investors understand & care about the metrics?
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Walking Like a Duck
Investment Advances for MFIs Characteristics• Professional presentation• Ensure the house is in order
– timely reporting; management systems in place
• Be realistic, cautious in management & growth• Address governance – establish a commercial entity• Have ownership represented by Board of Directors• Promote ‘double bottom line’ – economic & social return
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PICTURE
Growth
Which side of the line returns an investment?
Amazon.com (the early
years)
Gas Companies (Cash Cow)
Profitability
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Looking like a Duck
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Looking Like a Duck
MFIs Need to be Savvy & Business-like• Understand the investor ‘customer’• Develop investment ‘products’ customers want• Differentiate customers
– They are NOT all the same
• Tailor products to increase sales – e.g. Mercedes Benz, but also Ben & Jerry’s
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Looking Like a Duck
MFI ChallengePotential Solution
Not ProfitableReduce Growth
(a la picture)
Relatively Small Size
Merge w/ Other Programs
Balance Sheet Debt/Equity Ratio
Seek Equity, Quasi-Equity, Retain
EarningsExtensive Risks: i.e.Country & Currency
Secure Guarantees, Partner w/ ‘North’
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PICTURE
How much return are investors seeking?
(Source: Morino Institute)
Donation Investment
$ Return? NO
$ Return? YES
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Duck Examples - Microfinance &
the Capital Markets
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Duck Examples – MFIs in the Capital Markets
Prisma Microfinance• US for-profit international MFI• Wholly owned subsidiaries by country• Raised $1.25 mil venture capital to date,
– In same manner as any US high growth start-up
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Duck Examples – MFIs in the Capital Markets
Trinidad & Tobago MFI• Affiliated with development bank
– Offering received ‘BB’ Rating from private company
• Bond Offering: $2.8 mil– Well structured - Coupon paid quarterly, 10 year (w/
renewal), Liquid (w/ put option) – Customers given board placement - dev bank, private
investors (insurance companies), IADB (MIF)
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Duck Examples – MFIs in the Capital Markets
Investment Models Avail. to Individuals• Calvert Social Investment Fund (US SR Mutual Fund) &
Wisconsin Coordinating Council on Nicaragua (WCCN)
Investors: ‘choose’ returns, onlends @ neg rate 10%, med term. Size = $50 mil, $3 mil
• Oikocredit (Dutch based religious org)
Investors: negligible return, onlends @ market rates, short term. Size = $30 mil disbursed in 2001
• Blue Orchard (Swiss Investment Firm, not really individuals)
Investors: averaged 8% return to date, onlends @ market rates, short term. Size = $12 mil
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Duck Examples – MFIs in the Capital Markets
More Examples• Credit Unions generally, WOCCU specifically• Compartamos: $10 mil bond offering
– Mexican MFI Commercial Bank, ACCION affiliate– 3 tranches, all fully subscribed
• Investments w/ Minimal Return, but Worth Mentioning– Shorebank Advisory Services: Chicago CDFI, US domestic– Alterfin: Belgium bank offering secure CDs, then onlends them– Canadian Cred Union: FDIC insured savings (shhh!)
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PICTURE
Is the timing good for MFIs to access Capital Markets?
0%
2%
4%
6%
8%
10%
12%
Time
US
In
tere
st R
ate
s
-
200
400
600
800
1,000
1,200
SR
Fu
nd
s ($
000s
)
$$$ in SR Funds
(millions)
US Interest Rates
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Recap
• Introduction• Investor’s methods for capital investments
are different than donor’s methods• Investors as a market & their expectations• MFI typical behavior = barriers to
investment• New approaches possible
– in language, structure & behavior
• Case Studies of MFIs & investment options• Our Duck
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Q & A
Drew TulchinSocial Enterprise Associates
www.SocialEnterprise.NET
617-872-0194
Thanks for listening, quack!