tbli conference @booth/kellogg 2015: "investor challenges in emerging markets; lessons from the...
TRANSCRIPT
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