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Strong board leadership can help reduce a financial service provider’s vulnerability to external shocks and enhance its resilience.

> Posted by Paul DiLeo, Founder and Managing Director of Grassroots Capital Management and Governance Expert for the Africa Board Fellows Program

30784872334_b499dfc281_mThe following is part of an Africa Board Fellowship blog series spotlighting the experiences of participants and reflections from industry experts.

 

In the previous blog in this series, we reframed external challenges as a “normal” part of doing business for financial service providers (FSPs) targeting the base of the pyramid. And based on insights from Africa Board Fellows, we looked at specific ways board members can anticipate and even shape the challenging aspects of their operating environment. However, while most boards have more potential for external influence than they often exercise, there are always external factors that cannot be controlled. Boards must also continually focus on reducing the FSP’s vulnerability and enhancing its resilience31479737602_1ed7a2ba32_k

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> Posted by Paul DiLeo, Todd A. Watkins, and Anna Kanze

Discussion of impact investing has grown increasingly heated. There’s a conference nearly every week. Several weekly clipping services­—even a daily one—share news of the latest investments and conversions: 100% for impact! New benchmarks! New sectors! Perpetual motion! What fuel is creating this heat? The cold conviction that someday soon, all investing will be impact investing!

Meanwhile, in a parallel universe worried about losing its gravitational pull, a debate waxes and wanes over whether microfinance should be disqualified as an impact investment, either because its subsidized, non-profit origins magnetically repel VCs or because randomized controlled trials find that the average benefit to clients of microcredit is modest.

Which is ironic, because microfinance and its sister star, financial inclusion, remain the largest impact sectors in annual investor surveys.

This hyperactivity and incoherence can only mean one thing: the term “impact investing” has achieved its financial industry apotheosis: it means whatever we need it to mean. It’s a gaseous cloud that shapeshifts depending on who’s looking.

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> Posted by James Militzer, Editor, NextBillion Financial Innovation

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The following post, which was originally published on NextBillion, shares a conversation between Anna Kanze, COO of Grassroots Capital Management, and Daniel Rozas, Independent Consultant, on initial public offerings (IPOs) in microfinance. Both Anna and Daniel have contributed to a number of Financial Inclusion Equity Council (FIEC) publications.  Anna was the principal author of the recent FIEC report, “How to IPO Successfully and Responsibly: Lessons From Indian Financial Inclusion Institutions”. The podcast draws from the report’s findings and focuses on the effects of IPOs on Equitas Holdings, Ujjivan Financial Services, SKS Microfinance, and Compartamos.

Initial public offerings have long been a controversial topic in microfinance, and rightly so. The IPOs of Compartamos in Mexico and SKS Microfinance in India, in 2007 and 2010 respectively, made a lot of money for investors and turbocharged the sector’s growth. But they also sparked hyper commercialization and debt crises that rocked the industry, gravely harming its clients and tarnishing its public image.

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> Posted by Anna Kanze, Chief Operating Officer, Grassroots Capital Management

The initial public offering (IPO) of Chennai-based Equitas Holdings Ltd., the holding firm for the fifth-largest microlender in India, was very successful, raising nearly US$235 million (Rs 1,525 crore) and demonstrating the maturation of the microfinance and financial inclusion sectors in India.

When the stock opened on April 7 to the domestic market, the demand greatly exceeded the number of available shares (16x oversubscribed) and provided a strong exit (an average multiple of 3.6x) for Equitas’ shareholders, which included a mix of social and responsible investment funds and traditional private equity investors. The stock opened to international buyers on April 21 and closed with a price on the first day of trading 23 percent above the issue price.

Funds managed by Caspian Impact Investment Adviser (Caspian), an Indian investment management and advisory services company that invests capital in businesses delivering both financial and social value, were early investors in Equitas and active in its governance. (Another Caspian-­backed microfinance firm, Bengaluru-­based Ujjivan Financial Services Ltd., the fourth-largest microfinance lender in India by assets under management, raised approximately Rs 900 crore in an initial public offering that opened on April 28 and was nearly 41 times oversubscribed as of closing on May 2, 2016.) Given this market activity, we at Caspian and Grassroots Capital Management PBC, who work together closely on this and other investments, are prompted to take a closer look at what this IPO means for the company, its clients, and the industry.

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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.

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> Posted by Andrew Fixler, Associate, CFI

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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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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.