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> Posted by Amitabh Brar and Paul DiLeo, Investment Manager and President, Grassroots Capital Management
A rare, behind-the-scenes look
Performance data on private equity funds is not easy to collect, and privately-held microfinance investment vehicles (MIVs) are no exception. Much less is known about the investment process within these MIVs, and how the three main elements of their governance — board, investment committee, and fund manager — interact to create value within these funds. A new Calmeadow study written by Grassroots Capital Management shines light on the elusive subject of governance inside a pioneer equity fund, AfriCap. The study, sponsored by a group of AfriCap investors, evaluates strategy setting and resetting, investment decisions, and portfolio management from the standpoint of the prime movers governing the fund: the board and its committees.
About AfriCap
After three years of planning, AfriCap was launched in 2001 with $13 million to invest in support of commercial microfinance in Africa. The sponsors were inspired by the accomplishments of Latin America’s Profund, then in its sixth year, and indeed many of AfriCap’s investors had collaborated earlier on Profund. Fund investments were complemented with a $3 million technical assistance (TA) grant facility to strengthen investees’ capacity. AfriCap saw some spectacular early successes. Some of its investees are today well-recognized financial institutions, including Equity Bank (Kenya) and Socremo (Mozambique), among others. These early results led to increased investor interest and in 2007 new investors joined, tripling AfriCap’s capital to $42 million. The TA pool was boosted to $11 million. In addition, the decision was taken to transform the closed-end fund into a permanent investment company, and the manager into an African-owned and run management company with the ability to manage multiple funds
Yet, notwithstanding AfriCap’s early successes, the fund failed to recover investment costs in 12 out of 21 investments, and there were several write-offs. The fund ended up delivering only modest financial returns to its investors, and the results were especially disappointing for new investors who joined at the time of recapitalization. In 2013 the board approved a plan to liquidate the fund and return unused capital to the investors, reversing an earlier decision to run AfriCap as a permanent company.
> Posted by Andrew Fixler, Associate, CFI
Inclusive financial services in Africa are blooming. Between the turn of the millennium and 2011, the number of African MFIs reporting to the MIX increased from 58 to 397. From 2000 to 2014, the gross loan portfolio expanded over tenfold to $6 billion. Between 2003 and 2009, the number of borrowers served by MFIs in Africa increased from 1.6 million to 8.5 million. These numbers represent the development of an economic development tool for economies with very small financial sectors. It is impressive progress for an undeveloped industry beset by sparse human capital, problematic governance, and minimal external commercial interest.
AfriCap, which was the first private equity fund to invest exclusively in African microfinance institutions, and other microfinance investment vehicles (MIVs) funded by social investors have been a key growth factor through capitalizing MFIs and offering technical assistance and training. This interest is relatively new. The African MIV portfolio grew at an average annual rate of 36 percent between 2006 and 2013. This compares with an average growth of 38 percent for investments in the Latin America & Caribbean region since 2006, and 8 percent in both the Middle East & North Africa and South East Asia regions. The strong connection between MIV financing and microfinance sector growth was also noted in a World Bank paper, Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions in Sub-Saharan Africa. The paper, released in 2014, explains the relevance of greenfield MFIs to effecting financial inclusion in undeveloped financial markets. These institutions are financed in large part by equity and debt from development finance institutions, as well as a now-significant cohort of MIVs.
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