MICROCAPITAL STORY: Indian Venture Capital/ Private Equity Funds Turn to Investing in Microfinance Institutions in India

Venture Capital/ Private Equity funds in India are now looking at investments in Indian microfinance institutions (MFIs), reports The Times of India, an Indian daily owned by The Times Group [1]. The release quotes undisclosed industry observers as predicting that around INR 1000 crore (approx USD 200 million) will be invested by VC/ PE funds in the Indian microfinance space in 2009 alone. Presence of a good management structure coupled with the business scalability demonstrated by several MFIs has been indicated as some of the ‘essential elements’ favoring VC/ PE funding [1]. In addition, the social angle to the business, scope for high growth and opportunity for exit for investors are also projected as factors favorable to potential investors [1].

While the Indian microfinance market has grown to more than USD 1 billion in outstanding assets of MFIs [9], estimates of the potential size of the Indian microfinance market range from USD 15 billion to USD 30 billion [9]. Private equity investments into the microfinance sector in India started from January 2007 [8]. According to Aavishkaar Goodwell, a development company providing equity financing to MFIs in India, USD 500 million in private equity over the next five years is necessary to facilitate the growth of MFIs in India [6]. Of the 50 private equity deals worth USD 1 billion in the banking and finance sector in India over the last 18 months, it is estimated that MFIs alone have accounted for 20 deals amounting to USD 200 million [1]. As of June this year, 11 such deals amounting to a total USD 178 million in the microfinance sector occurred in the financial year 2009 alone [8], according to a news release on the Indian financial news portal, the Financial Chronicle. While investors typically have their own set financial benchmarks, the IRR (Internal Return Rate which is used to measure and compare the profitability of investments) in the MFI space is 25-30 percent, as per information in the press release [1].

VC/ PE players have sounded encouraging on the possible foray of their respective firms into the microfinance space. Mr. Harish Gandhi, executive director of the venture fund Cannan Partners, says ‘We are actively looking at the MFI space and if there is a suitable opportunity, we would invest in this sector’ [1]. Cannan Partners does early stage investment, primarily focusing in healthcare and technology and has offices in India, Israel and the United States [3]. Mr. Sameer Mehta, director of Atlas Advisory, who states that ‘many’ venture capitalists are now ‘excited’ about investing in the microfinance space also opines, ‘Many [Indian] MFIs, especially south-based ones have the right professionals and processes in place’ [1]. Atlas Advisory’s focus sectors include Clean Technology, Healthcare, Nanotechnology and Financial/ Consulting Services among others [4]. As per a July 2009 report on the Indian Business news portal LiveMint.com, VC firms like Norwest Venture Partners, Mayfield Fund and Lightspeed Venture Partners have ‘already declared their keen interest in the [MFI] space’ [10].

A LiveMint report states that with the rise in investor interest, valuations of MFIs have also increased. It is estimated that most MFIs are now raising funds at approximately 10 times their earnings while many are doubling earnings annually [10]. This rise in valuations has also been projected as one of the reasons why many funds have stayed away from this field. In this regard, the managing director of Lightspeed Venture Partners, Mr. Bejul Somaia says: ‘Even though we really like the [microfinance] sector, the reason we have not invested is that we find the valuations to be high relative to the risks we see and also relative to the valuations of other companies which serve the unbanked or credit deprived segment’ [10].

Some India based microfinance focused funds primarily investing in MFIs include Aavishkaar India Microventure Capital Fund and Bellwether Microfinance Fund. Aavishkaar’s recent investments include a July 2009 equity investment worth INR 45 million (approx USD 1 million) in Suryoday Microfinance, a Pune-based non-banking finance company (NBFC), engaged in ‘providing loans to women from economically weaker sections’ [5]. Other recent investments by Aavishkaar include a USD 9.87 million in the Hyderabad based MFI, Bhartiya Samruddhi Finance Ltd (BSFL) in May 2009 [6]. Amongst Bellwether’s latest investments include a USD 479,600 equity investment in Equitas Micro Finance India, a Chennai based microfinance institution (MFI), in May 2009 [7]. The largest commercial funder of microfinance in India is the ICICI bank which is also the second largest bank in the country with total assets worth USD 75 billion (as of March 2009) [9, 11]. It is expected that by 2010 ICICI’s microfinance lending portfolio would be around USD 10 billion [9].

By Bharathi Ram, Research Assistant

Bibliography:

[1] Times of India, VC/ PEs bet on microfinance, http://timesofindia.indiatimes.com/NEWS/Business/India-Business/VC/PEs-bet-on-micro-finance/articleshow/4844292.cms

[2] India PR Wire, Aavishkaar Goodwell Invests INR 45 million in Suryoday Microfinance, http://www.indiaprwire.com/pressrelease/financial-services/2009071629507.htm

[3] Atlas Advisory: http://atlasadvisory.org

[4] Canaan Partners: http://www.canaan.com/

[5] Suryoday Microfinance: http://suryodaymf.com/

[6] MicroCapital Story, Bhartiya Samruddhi Finance Ltd Raises USD 987m in Capital, https://www.microcapital.org/microcapital-story-bhartiya-samruddhi-finance-ltd-a-unit-of-basix-group-raises-usd-987m-in-capital/

[7] MicroCapital Story, Bellwether Microfinance Fund invests 480k in Equitas Micro-finance, https://www.microcapital.org/microcapital-story-bellwether-microfinance-fund-invests-480k-in-equitas-micro-finance-india/

[8] Financial Chronicle, Microfinance Funds Await Better Cash Flow, http://www.mydigitalfc.com/personal-finance/microfinance-funds-await-better-cash-flow-867

[9] Aavishkaar Goodwell, http://www.aavishkaargoodwell.com/what_we_do.php

[10] LiveMint.com, Microfinance’s small town success attracts Venture Investors, http://www.livemint.com/2009/07/13221413/Microfinance8217s-smalltow.html?pg=1