Microfinance Investment:

Due Diligence for Financial and Social Returns

Joan TrantTake Action Conference

March 15, 2011

Discussion Points

• IAMFI: Commercial Investors’ Perspective

• Microfinance Investment Landscape

• Due Diligence Framework and Tools

Presenter’s Perspective: About IAMFI

IAMFI is a global membership organization dedicated to helping commercially oriented microfinance investors, particularly Limited Partner institutional investors that invest through microfinance investment intermediaries (MIIs), to deploy 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

Founding MembersDOEN Foundation TIAA-CREFOmidyar Network Plainfield Asset ManagementGray Ghost Ventures Rockefeller FoundationGray Matters Capital Triodos ManagementPrudential

Charter MembersBlueOrchard Finance USA, G. Casagrande (SPBD, MicroDreams),Calvert Foundation, Co-operative Financial Services, Developing World Markets, Elevar Equity, Global Microfinance Partners, HSBC, J.P. Morgan, MicroCredit Enterprises, MicroFinanza Rating, MicroVest, Minlam Asset Management, Morgan Stanley, Norwegian Microfinance Initiative, Planet Rating, Prudential, Omidyar-Tufts Microfinance Fund, Orrick Herrington & Sutcliffe, Ronoc, Triple Jump, individuals

Microfinance Funding Demand

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

• Total current microfinance customers: 130 million

• Total estimated potential customers: 1.5 billion

• Total estimated microfinance loans outstanding: US$65 billion

• Estimated funding gap: US$235 billion

Microfinance Investors: Limited PartnersInstitutional investors

• Government-owned Development Financial Institutions(DFIs)

• Corporations (domestic and int’l banks, insurance cos.)• Pension funds• Endowments• Private equity and hedge funds• Foundations• Family Offices

Individual Investors

• High net worth• Retail

Microfinance Investments US$13.27 billion invested at 12/09 by primarily cross border funders

• 122 MIIs• Investor breakdown: DFIs: 21%; Individuals: 30%; Private sector institutional investors: 49%

Fixed Income• 72% of current investment• 2009 average net yield: 7.9% (range: 3.1-15.2%)

Equity• 28% of current investment, and growing• Median Book Value Sept. 08 - Dec. 09: 1.3 - 5.0x (42 transactions)

• Sale of Latin American MFI shares Aug. 2009: 2.6x book• SKS IPO, July 28, 2010: 4.2x book

• Investors targeting ROE of 9-25% and IRR of 15-20%

Sources: J.P. Morgan - CGAP Equity Surveys 2009-2010, IAMFI

Modern Portfolio Theory and Microfinance

Portfolio Theory: Key Concepts• Diversification• Low correlation• Bias toward equity• Illiquidity acceptable due to long-term horizon

Affinities with Microfinance• MIVs offer diversification across countries, currencies• Evidence of low correlation with OECD and emerging market

assets• Increasing equity focus• Long-term investment strategy – with compensation for

illiquidity

Key Due Diligence Themes – with financial and social implications

• Management and ownership structure• Investment strategy, philosophy and process• Risk management process and controls• Operations• Investment returns• Structural issues

Tools for Social Due Diligence• Smart Campaign (client protections)

• Social Performance Task Force (11 indicators, process addresses from intent to impact)

• GIIN Impact Reporting and Investment Standards (metrics on: organization, product, financial, operational and product impact)

• Principles for Investors in Inclusive Finance (fair treatment and protection of clients)

• Charting the Course (due diligence recommendations and tools)

• Social ratings of microfinance institutions and microfinance investment vehicles

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 ServicesInformation 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• First industry assessment of commercial debt performance• Global survey on private equity investment• GP and LP due diligence checklists• Social Performance measurement survey• Others

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

• 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.

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.

IAMFI 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.