TBLI Conference January 23, 2015

Investor Challenges

in Emerging Markets:

Lessons from the

Microfinance Industry

Paul Christensen

Clinical Professor of Finance

Microfinance Defined

• “Making small loans, usually less than $200, to groups of individuals, usually women, to establish or expand a small, self-sustaining business” - Grameen Foundation

• “The supply of loans, savings, and other basic financial services to the poor” - CGAP

• “Banking and/or financial services targeted to low-and-moderate income businesses or households, including the provision of credit” - ACCION International

• “The provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises” - Asian Development Bank

1

Overview of the MF Industry

• Globally, there are over 10,000 formal microfinance institutions operating in nearly every country

• The vast majority of MFIs started out as mission-driven, non-profit organizations (NGOs)

• Approximately 750 companies have successfully transformed into larger scale commercial operations serving 80% of the market

• Total industry assets have grown from $7 to $100 billion since 1996 (20% CAGR)

• International finance institutions, commercial banks and microfinance funds have invested billions of dollars in MFIs to support their growth

2

ShoreCap International

3

2003-2014

Investors Investee Locations

• Afghanistan

• Armenia

• Bangladesh

• Belarus

• Cambodia

• The Gambia

• India

• Kenya

• Mongolia

• Nigeria

• Pakistan

• Philippines

• Rwanda

• Tajikistan

• Uganda

Evslin

Family

Foundation

Risk-Return Trade Off

4 Source: BNY Mellon Investment Strategy and Solutions Group, 2014

Expected Return

Sta

ndard

Devia

tion

US Treasury Bills

US Equities

US Real Estate

Corporate Bonds

Municipal Bonds

Hedge Funds

US Venture Capital

US Private Equity

Emerging Market

Equity

Emerging Market Risks

Type of Risk

Mitigation Strategies

• Political Risk Political Risk Insurance

• Foreign Exchange Risk Hedges, Swaps, Portfolio

Diversification

• Reputation Risk Due Diligence, Background Checks

• Commercial Risk Contracts, Board Seats,

Minority Voting Rights

• Exit Risk Put Options, Block Sale and IPO

Agreements

5

Political Risk Insurance

• Currency inconvertibility

• Expropriation of assets

• War and civil disturbance

• Breach of government contract

• License cancellation

6

FX Portfolio Example

7

Impact of FX Movements A B C D E F G

Local Currency Denomination Taka Rupee Shilling Dram US Dollar Tugrik Somoni

Exchange Rate at Closing (FX/USD) 58.4 45.8 81.6 447.0 1.0 1,215.0 3.20

Exchange Rate Today (FX/USD) 71.3 44.0 70.0 363.5 1.0 1,165.0 3.43

Change in Value of Local Currency (18.1%) 4.1% 16.6% 23.0% 0.0% 4.3% (6.8%)

Price / Share at Closing (in FX) 100.0 10.0 720.0 35,854 10.0 1,561.1 30.0

BV / Share at Closing (in FX) 97.8 10.7 760.0 36,158 10.0 1,632.1 37.0

BV / Share Today (in FX) 198.6 12.7 871.9 44,257 14.3 1,848.0 50.0

Real Growth (Loss) in BV / Share 103.1% 19.1% 14.7% 22.4% 42.6% 13.2% 35.1%

USD Growth (Loss) in BV / Share 66.4% 23.9% 33.7% 50.5% 42.6% 18.1% 26.0%

FX Gain (Loss) in Investment Value ($538,901) $26,742 $144,485 $425,325 $0 $54,247 ($97,438)

Portfolio Companies

Source: ShoreCap International Investor Reports

Due Diligence

8

Received N/A

I. Financial Statements

A. General

1. Audited financial statements for the last three (3) years _____ _____

2. Comparison of Audited financials statements (above) to yearly budget _____ _____

3. Interim statements for most recent period with comparison to prior year _____ _____

B. Asset Reports

1. Loan portfolio breakdown by product type or line of business _____ _____

2. Inventory of fixed assets owned including additions, disposals and depreciation _____ _____

for last three (3) years

3. List of other assets and pre-paid expenses with valuation methodology _____ _____

C. Liability Reports

1. Deposit breakdown by type of product and maturity dates _____ _____

2. Aged listing of accounts payable and accrued liabilities _____ _____

3. Listing of all debt including principle balances, lender name, interest rate, _____ _____

terms and conditions

4. Copy of any lease agreements _____ _____

5. Description and amount of any contingent liabilities and off-balance sheet items _____ _____

Managing Commercial Risk

• Board representation or observation rights

• Supermajority voting rights

• Investment phasing / tranches

• Amended charter / articles of incorporation

• Shareholder agreements

• Side letters

• Technical assistance plans

9

Investment Exit Options

10

• Put option to other shareholder(s)

• Management buy-out

• Employee buy-out

• Block sale agreement

• Trade sale / strategic buyer

• IPO / share listing

Microfinance IPOs

11

Company

Country

Year

Market Value

at Time of Offering

BRI Indonesia 2003 $1.2 billion

BRAC Bank Bangladesh 2006 $25 million

Equity Bank Kenya 2006 $90 million

Compartamos Mexico 2007 $1.6 billion

SKS

Microfinance India 2010 $1.5 billion

Sources: Council of Microfinance Equity Funds, Ira Lieberman, May 2008,

CGAP Focus Note, September 2010