Microfinance Overview 080904 - Wokai ?· Microfinance Overview Corporate Strategy Americas Bhakti Mirchandani…

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<ul><li><p>Microfinance Overview</p><p>Corporate Strategy</p><p>Americas</p><p>Bhakti Mirchandani</p><p>bhakti.mirchandani@lehman.com</p><p>646-333-9129</p><p>September 2008</p><p>Confidential Presentation</p></li><li><p>Microfinance Landscape Overview and Key Terms</p></li><li><p> Role in landscape. Facilitate collective debt and equity investment in microfinance institutions</p><p> Investment opportunities. Microfinance investment vehicles are becoming more commercial,1 but many are not yet commercial. The most commercially attractive MIVs focus on profitable MFIs that are not overbanked</p><p> Role in landscape. Provide financial and perhaps ancillary services, such as business development and financial literacy training, as well as health care and education, directly to the self-employed poor</p><p> Investment opportunities. Given the relatively small size of most retail microfinance institutions, the cost as a percentage of assets of investing in them individually can be prohibitive. To maximize potential commercial returns, it therefore makes sense to either invest directly in Tier I (larger and more profitable) MFIs or through MIVs in Tier I and II MFIs</p><p>Retail Microfinance Institutions (MFIs)</p><p>Microfinance Landscape: 3 Types of PlayersMicrofinance Landscape Overview and Key Terms</p><p>Microfinance Investment Vehicles (MIVs)</p><p>Networks</p><p> Role in landscape. Provide retail MFIs with technical assistance, financial products and services, and support for advocacy</p><p> Investment opportunities. Currently not a commercial investment opportunity, but may be a means of sourcing deals; a number of networks have started their own microfinance investment vehicles</p><p>___________________________1. Please see page 2 for definition of Commercial.</p></li><li><p> Aim to make capital available to MFIs through sustainable mechanisms to support their development and their growth without necessarily achieving financial return</p><p> Have clearly stated financial objectives, but are currently targeted to private donors, development agencies, and other such actors in the microfinance industry </p><p> Aim to provide a financial return to socially responsible and commercial private and institutional investors while maintaining key social and development objectives. Commercial MIVs would be clearly targeted towards private and institutional investors </p><p>Commercially -Oriented</p><p>Development</p><p>Commercial</p><p>3 Types of Microfinance Investment Vehicles (MIVs)1Microfinance Landscape Overview and Key Terms</p><p>___________________________1. Source: Patrick Goodmans Microfinance Investment Funds: Key Features</p></li><li><p>Microfinance Landscape</p><p>There is some movement in the microfinance industry toward more commercially-driven activities. Most of the industry remains development- and commercially-oriented </p><p>Microfinance Landscape Overview and Key Terms</p><p>Retail Microfinance Institutions (MFIs) $1MM+ Microfinance Investment Vehicles (MIVs)1</p><p>250 Commercial</p><p>Development</p><p>Commercially -Oriented</p><p>Development</p><p>Commercially Oriented2</p><p>Commercial</p><p>Development</p><p>Commercially -Oriented</p><p>Total = 61</p><p>Networks (Not Viable Investments for Commercial Investors)</p><p>~10,000MFIs</p><p>47%</p><p>36%</p><p>18%</p><p>1. Of the 96 MIVs in existence in July 2008, 61 reported to MIXMarket $1MM+ in AUM and disclosed the nature of their sources of funding2. Limited to cases in which networks have launched microfinance investment vehicles</p></li><li><p>Microfinance Investment Mechanics and Investors</p><p>Investors typically access microentrepreneurs through a series of intermediaries. The 3 main categories of investors (purely commercial investors, socially responsible investors, and development financial institutions) have different goals and approaches </p><p>Microfinance Landscape Overview and Key Terms</p><p>Tier I (60)</p><p>8,000-9,000 MFIs</p><p>Tier II: 61-250 well-run </p><p>MFIs</p><p>Maturity, P</p><p>rofitability and C</p><p>omm</p><p>ercial Viability</p><p>Microfinance Investing via Investment Banks</p><p>Microfinance Investment Vehicles</p><p>Retail MFIs</p><p>Microentrepreneurs</p><p> Purely commercial investors seek to optimize risk-adjusted returns</p><p> Socially responsible investors - integrating personal values and societal concerns with investment decisions through Socially Responsible Investing (SRI)</p><p> Development financial institutions (DFIs) - the private sector arms of public finance institutions (i.e., the International Finance Corporation of the World Bank). DFIs can invest in MIVs or directly in MFIs</p><p>Investors</p></li><li><p>Potential Capital Needs Cannot be Met by Traditional Sources1</p><p>In the long-term, commercially-oriented2 and development3 capital will not be able to fund the provision of credit at the required scale</p><p>Microfinance Landscape Overview and Key Terms</p><p>US$17B</p><p>US$263B</p><p>Microfinance</p><p>Latent Microfinance Demand</p><p>Domestic debt19%</p><p>Domestic Equity12%</p><p>Foreign Debt16%</p><p>Foreign Equity5%</p><p>Foreign Guarantee</p><p>2%</p><p>Domestic Guarantee with </p><p>Debt1%</p><p>Microentrepreneur Deposits</p><p>45%</p><p>Total Investment</p><p>Current supply</p><p>Potential demand</p><p>100% = ~$17B</p><p>Domestic Investment: ~$13B (vs. Foreign Investment: ~$4B)___________________________</p><p>1. Source: McKinseys Optimizing Capital Supply in Support of Microfinance Industry Growth presented October 2006. Study drew upon 2004 data.2. Commercially-oriented capital - has clearly stated financial objectives, but is largely funded by private donors, development agencies, and other such actors in the microfinance industry. 3. Development capital aims to make capital available to MFIs through sustainable mechanisms to support their development and their growth without necessarily achieving financial return. </p></li><li><p>Tier I and II MFIs</p></li><li><p>MFI Universe Summary Statistics: Regional Distribution</p><p>68% of MFIs and 66% of MFI assets are concentrated in 2 regions: Latin America/Caribbean and Europe/Central Asia</p><p>Tier I and II MFIs</p><p>Sub-Saharan Africa</p><p>6%</p><p>East Asia Pacific18%</p><p>Europe Central Asia18%</p><p>Latin America/Carib</p><p>bean48%</p><p>Middle East/North </p><p>Africa3%</p><p>South Asia Region</p><p>7%</p><p>Global Distribution of Tier I and Tier II MFI Assets</p><p>Sub-Saharan Africa14%</p><p>East Asia Pacific</p><p>5%</p><p>Latin America/Carib</p><p>bean46%</p><p>Middle East/North </p><p>Africa4%</p><p>South Asia Region</p><p>9%</p><p>Europe Central Asia22%</p><p>Global Distribution of Tier I and Tier II MFIs</p><p>___________________________1. Source: MIXMarket Data as of July 26, 2007</p></li><li><p>Concentration on Tier I MFIs1</p><p>Tier I </p><p>MFIs</p><p>Tier III and IV MFIs</p><p>Tier II MFIs</p><p>Microfinance CDOs and DFI investments have been focused on Tier I MFIsTier I and II MFIs</p><p>5 CDOs (excluding Lehman/MicroVest transaction and BOLD II) </p><p>Avg. deal $4.5MM50 MFIs</p><p>19 DFIsAvg. deal $3.9MM</p><p>207 MFIs</p><p>74 MIVsAvg. deal $1MM</p><p>450+ MFIs</p><p>___________________________1. Source: Elizabeth Littlefields Building Financial Systems for the Poor: MIV and DFI Investment Examined2. Comparative economics of top quartile Tier I and Tier II MFIs detailed on page 12</p><p>CDO, DFI, and MIV Investments in MFIs</p></li><li><p>MF Overview: Global Presence1</p><p>Distribution of Tier I MFIs ($80mm+ loan portfolios) &amp; Tier II MFIs ($10-80mm) </p><p>1. Source: MIXMarket FYE 2006 Data as of July 26, 2007 </p><p>Tier I (top 60 loan portfolios)</p><p>Tier II (61-250 in loan portfolio size)</p><p>Africa 39</p><p>Benin 4</p><p>Burkina Faso 1</p><p>Cameroon 4Cote D'Ivoire 1</p><p>Ethiopia 4Ghana 2</p><p>Kenya 4</p><p>Malawi 1</p><p>Mali 3</p><p>Mozambique 2</p><p>Senegal 4South Africa 3</p><p>Tanzania 2</p><p>Togo 1</p><p>Tunisia 1Uganda 2</p><p>Avg Loan $319</p><p>Lat. Am./Carib 97</p><p>Bolivia 13Brazil 2Chile 3</p><p>Colombia 9Costa Rica 1Dominican Republic 2</p><p>Ecuador 10</p><p>El Salvador 5Guatemala 3</p><p>Haiti 2</p><p>Honduras 3</p><p>Mexico 6Nicaragua 8</p><p>Paraguay 5Peru 23Uruguay 1</p><p>Venezuela 1</p><p>Avg Loan $1,189</p><p>E. Asia Pacific 14</p><p>Cambodia 4Indonesia 2</p><p>Philippines 6</p><p>Vietnam 2Avg Loan $560</p><p>S. Asia 30</p><p>Bangladesh 10India 13</p><p>Pakistan 4</p><p>Sri Lanka 3</p><p>Avg Loan $100</p><p>M.E./N. Afr 9</p><p>Egypt 4</p><p>Jordan 1</p><p>Morocco 4Avg Loan $931</p><p>Europe/C. Asia 61</p><p>Afghanistan 3</p><p>Albania 5</p><p>Armenia 3</p><p>Azerbaijan 5</p><p>Bosnia and Herz. 12</p><p>Bulgaria 1Georgia 3</p><p>Kazakhstan 2</p><p>Kosovo 4Kyrgyzstan 4</p><p>Macedonia 2</p><p>Moldova 1</p><p>Mongolia 2</p><p>Montenegro 1</p><p>Poland 1</p><p>Romania 3</p><p>Russia 3</p><p>Serbia and Mont. 3</p><p>Tajikistan 2</p><p>Ukraine 1</p><p>Avg Loan $2,682</p><p>Tier I and II MFIs</p></li><li><p>MIVs</p></li><li><p>Foreign Capital Investment in Microfinance is Booming</p><p>The two main foreign investors in microfinance are DFIs (the private sector arms of public finance institutions) and MIVs (private MIVs) </p><p>MIVs</p><p>$1.1B</p><p>$3.0B</p><p>2004 2007</p><p>Development Financial Institution (DFI) Portfolios</p><p>$3.7B</p><p>$637MM</p><p>2004 2007</p><p>Microfinance Investment Vehicle (MIV) Portfolios</p><p>___________________________1. Source: Elizabeth Littlefields Landscape of Microfinance Investment in 2008 presented at 2008 ACCION International and Credit Suisse Cracking the Capital Markets for Microfinance Conference</p><p>+39.7% CAGR +79.8% </p><p>CAGR</p></li><li><p>Microfinance Investment Vehicles1</p><p>There were 93 microfinance investment vehicles at FYE 2007;2 half had been created in 3 years (2005 - 2007)</p><p>MIVs</p><p>1975 19831984 1989 1992</p><p>1994 19951996 1997</p><p>19981999</p><p>20002001</p><p>2002</p><p>2003</p><p>2004</p><p>2005</p><p>2006</p><p>2007</p><p>0</p><p>10</p><p>20</p><p>30</p><p>40</p><p>50</p><p>60</p><p>70</p><p>80</p><p>90</p><p>100</p><p>1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905 1905</p><p>No. of funds</p><p>Microfinance Investment Vehicle Growth</p><p>___________________________1. Source: Elizabeth Littlefields Landscape of Microfinance Investment in 2008 presented at 2008 ACCION International and Credit Suisse Cracking the Capital Markets for Microfinance Conference2. 96 microfinance investment vehicles were in existence in July 2008</p></li><li><p>MIV AUM and Asset Concentration</p><p>Most MIVs are quite small: the top 10 hold 60% of MIV investments; the top 3 hold 34%MIVs</p><p>% of MIVs at Various AUM Levels(1)</p><p>$89mm</p><p>$101mm</p><p>$108mm</p><p>$117mm</p><p>$157mm</p><p>$193mm</p><p>$298mm</p><p>$569mm</p><p>$583mm</p><p>$800mm</p><p>db Microfinance-Invest Nr. 1</p><p>BOLD</p><p>BOLD 2</p><p>SNS Institutional</p><p>responsAbilityLeaders Fund</p><p>responsAbility</p><p>Dexia MicrocreditFund</p><p>Oikocredit</p><p>European Fund forSoutheast Europe</p><p>ProCredit HoldingAG</p><p>MIV AUM Concentration(3)</p><p>___________________________1. Source: Elizabeth Littlefields Building Financial Systems for the Poor: MIV and DFI Investment Examined, presented at 2007 ACCION International and CSFB Cracking the Capital Markets for </p><p>Microfinance Conference2. Source: MixMarket Microfinance Funder Universe as of September 28, 20073. Source: Elizabeth Littlefields Landscape of Microfinance Investment in 2008 presented at 2008 ACCION International and Credit Suisse Cracking the Capital Markets for Microfinance Conference. </p><p>Exchange rate EUR/USD 1.47285 from 12/31/07 </p><p>$0-20 MM16%</p><p>$20-50 MM21%</p><p>$50 MM+63%</p><p>Aggregate MIV Microfinance Assets by AUM(2)</p><p>$0-20MM82%</p><p>$20-50MM10%</p><p>$50MM+8%</p></li><li><p>MIV: Regional and Asset Class Concentration</p><p>Most MIVs are concentrated in Europe and Latin America, and in hard currency debtMIVs</p><p>0%</p><p>3%</p><p>4%</p><p>5%</p><p>7%</p><p>36%</p><p>45%</p><p>Middle East/NorthAfrica</p><p>South Asia Region</p><p>Global</p><p>East Asia Pacific</p><p>Sub-Saharan Africa</p><p>LatinAmerica/Caribbean</p><p>Europe/CentralAsia</p><p>MIV Regional AUM Concentration</p><p>Guarantees1.5%</p><p>Debt77%</p><p>Equity21%</p><p>MIV Asset Class Concentration</p><p>30% Local Currency70% Hard Currency</p><p>75% Greenfield25% Other</p><p>This creates opportunity in other regions, in local currency debt, &amp; in existing MFI equity1. Source: Elizabeth Littlefields Landscape of Microfinance Investment in 2008 presented at 2008 ACCION International and Credit Suisse Cracking the Capital Markets for Microfinance Conference</p></li><li><p>Tier I and II MFI Capital Structure Distribution vs. Commerical MIV Microfinance Asset Class Distribution</p><p>MIVs</p><p>Equity, $4.8B , 15%</p><p>Loans and Debt, </p><p>$26.9B, 85%</p><p>Tier I and II MFI Capital Structure Distribution1</p><p>Loans and Debt</p><p>71.8%</p><p>Equity26.3%</p><p>Guarantee1.8% Other</p><p>0.1%</p><p>Commercial MIV Microfinance Assets by Asset Class2</p><p>The aggregate capital structure of Tier I and II MFIs is 85% debt and 15% equity. Meanwhile, in aggregate, commercial MIV microfinance AUM is 72% debt and 26% equity</p><p>___________________________1. Source: MIXMarket MFI Data as of July 26, 20072. Source: MixMarket Microfinance Funder Universe as of September 28, 2007</p></li><li><p>Funding of MIVs</p><p>SRIs are nearly 50% of MIV funding; combined, SRIs1 and DFIs2 are 80%+ of fundingMIVs</p><p>DFIs (mainly Europe- based)36%</p><p>Mainstream Investors</p><p>17%</p><p>Socially Responsible Investors</p><p>47%</p><p>MIV AUM by Funding Source</p><p>Other30%</p><p>Europe70%</p><p>Socially Responsible Investor Domicile</p><p>___________________________1. Socially responsible investors - integrating personal values and societal concerns with investment decisions through Socially Responsible Investing (SRI)2. Development financial institutions (DFIs) - the private sector arms of public finance institutions (i.e., the International Finance Corporation of the World Bank). DFIs can invest in MIVs or directly in MFIs</p><p> SRIs are focused on the societal impact of their investments and DFIs interested in the development impact in particular</p><p> SRIs and DFIs are sometimes willing to tradeoff risk-adjusted return for the creation of positive externalities</p></li><li><p>MIV Investment Concentration: Tier I MFIs in ECA &amp; LAC</p><p>10 MFIs comprise 26% of MIV Investment; all 10 are Tier I MFIs in Europe/Central Asia and Latin America/the Caribbean</p><p>MIVs</p><p>44,684</p><p>37,154</p><p>36,693</p><p>31,966</p><p>30,333</p><p>25,348</p><p>16,392</p><p>15,544</p><p>12,676</p><p>12,375</p><p>ProCredit Bank Serbia &amp; Montenegro</p><p>ProCredit Bank Georgia</p><p>ProCredit Bank Bulgaria</p><p>ProCredit Bank Ukraine</p><p>Banco Solidario, S.A.</p><p>Banco ProCredit Ecuador</p><p>MIBANCO, Banco de la Microempresa, S.A.</p><p>Fondo Financiero Privado F.I.E. S.A.</p><p>Findesa</p><p>Opportunity Bank Montenegro</p><p>MIV Investment in Specific MFIs ($000s)(1)</p><p>___________________________1. Source: Elizabeth Littlefields Building Financial Systems for the Poor: MIV and DFI Investment Examined</p><p>Of this 26%, 62% is in Europe/Central Asia (gold bars); the remainder is in </p><p>Latin America/the Caribbean (green bars)</p></li><li><p>Investor Orientation in MIVs: Commercial Focus(1)MIVs</p><p>Commercially-Oriented</p><p>27%</p><p>Development16%</p><p>Commercial 57%</p><p>MIV Microfinance Assets by Investor Orientation</p><p>57% of overall MIV AUM is commercial. Dexia (Blue Orchard) and Gray Ghost are the largest commercial MIVs </p><p>___________________________1. Source: MixMarket Microfinance Funder Universe as of September 28, 2007 and deal press releases</p></li><li><p>Microfinance Capital Markets Transactions</p></li><li><p>Microfinance Capital Markets Transaction Database</p><p>Roughly 20% of the $1,611MM in cumulative microfinance capital markets transactions is due to deals that occurred 2002-2005. Investor interest in microfinance started slowly </p><p>Microfinance Capital Markets Transactions</p><p>Microfinance Capital Markets Transactions: 2002 - 2005</p><p>Source: Womens World Bankings January 2007 Capital Markets Workshop.1. Assuming 1 US dollar = 0.841145 euro. This represents the average of 0.82895 (1 Nov 05 exchange rate) and 0.85334 (30 Nov 05 exchange rate). Source for exchange rates: www.oanda.com.</p><p>Issuer Date Amount ($US) Country(s) Tenor Type &amp; Comments</p><p>2002Compartamos July-02 $10.3M Mexico 3 yr 1rst bond issue, Mx Peso denominated, floating rate / 13.6% initial coupon / mxA+ rated / 80% individual &amp; 20% </p><p>institutional investorsCompartamos November-02 $5.0M Mexico 3.25 yr 2nd issue, Mx Peso denominated, floating rate / 13.02% initial coupon / mxA+ rated / 50/50 split between institutional </p><p>and individual investorsMi Banco December-02 $6.0M Peru 2 yr Peruvian sol denominated / fixed rate, 12% coupon, AA/AA rating / 50% guarantee of principal provided by USAID</p><p>2002 Total $21.3M</p><p>2003Compartamos April-03 $5.0M Mexico 3 yr 3rd bond issue, Mx Peso denominated, floating rate, 11.17% initial coupon, mxA+ ratedMiBanco Septem...</p></li></ul>

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