MICROCAPITAL.ORG STORY: Indian Microfinance Sector Sees Increase in Private Equity Investments from $61m to $143m

The Financial Express, a web-based Indian financial news source, said that from January to October of 2009, the Indian microfinance sector has seen a significant growth in private equity (PE) investments. In that time period, eleven PE deals worth USD 143 million were carried out, compared to eight deals worth USD 61 million in the previous year. According to the article, the Indian microfinance sector’s compound annual growth rate (CAGR) has reached 105% [1].

The Times of India, an Indian daily news source owned by The Times Group, indicates predictions, by unidentified financial analysts, that approximately USD 200 million will be invested by venture capital/private equity funds in the Indian microfinance sector in 2009 [2]. For MicroCapital coverage of this story, please visit https://www.microcapital.org/microcapital-story-indian-venture-capital-private-equity-funds-turn-to-investing-in-microfinance-institutions-in-india/

According to Indian Microfinance, a virtual news source for microfinance in India, since 2008, USD 210 million has been invested in microfinance in India through 20 deals, of which Hyderabad (India)-based SKS Microfinance accounted for 53 percent [3]. SKS, India’s largest microfinance institution (MFI), received USD 75 million from PE investors in November 2008 [4]. According to the 2008 microfinance industry report by Intellecap, a social investment advisory firm, the current Indian MFI market is valued at approximately USD 1.5 billion [3].

SKS Microfinance is a non-bank finance company (NBFC) providing financial services for the poor. SKS was founded in 1997 and is based in Andhra Pradesh, India. According to the Mix Market, the microfinance clearinghouse, SKS has a gross loan portfolio of USD 278, 710, 715, and 3, 520, 826 active borrowers. As of March 31, 2009, SKS had total assets of USD 596, 162, 206, a debt to equity ratio of 3.57, an ROA of 3.68%, and an ROE of 18.72% [5].

Following closely behind SKS is Hyderabad-based MFI, Spandana Sphoorty Financial Ltd, raising USD 6.4 million in PE investments [6]. According to the MIX Market, the microfinance information clearinghouse, Spandana was established in 1998 and has approximately 1.2 million active borrowers. As of March 31, 2008 Spandana’s gross loan portfolio was USD 182.2 million and total assets were USD 208.9 million. As of the same date, the institution’s debt-to-equity was 8.56, ROE was 53.62 percent and ROA was 4.34 percent [7].

According to Xavier Reille, leader of the Consultative Group to Assist the Poor’s (CGAP) Transparency Team, there is still much work to be done to encourage interest in equity investment in microfinance. Mr. Reille explains that “primary issuances are still limited by the small pool of investable MFIs and by the absence of an organized secondary market. A majority of transactions are in the form of private placements, and so far there have been only two pure microfinance IPOs (Compartamos in Mexico and Equity Bank in Kenya). With the current turmoil in the market, it’s unlikely we’ll see new ones any time soon” [6].

CGAP and J.P. Morgan have teamed up to analyze the challenge of valuing equity investments in microfinance. They have produced a set of benchmarks for the valuation of microfinance equity. For MicroCapital coverage of this analysis, please visit https://www.microcapital.org/microcapital-story-the-consultative-group-to-assist-the-poor-cgap-with-support-from-jp-morgan-chase-co-releases-empirically-based-study-of-valuation-models-used-in-microfinance-equity-invest/.

For more information regarding PE investments in microfinance, please see [7]- [10] of the bibliography.

By: Diya Chopra, Research Associate

Bibliography:

[1] Financial Express

http://www.financialexpress.com/news/Soaring-microfinance-lures-PE-investors/537843/

[2] Times of India

http://timesofindia.indiatimes.com/NEWS/Business/India-Business/VC/PEs-bet-on-micro-finance/articleshow/4844292.cms

[3] Indian Microfinance

http://www.indiamicrofinance.com/microfinance/private-equity-microfinance/high-valuations-deter-private-equity-investments-in-indian-microfinance-sector.html

[4] Indian Microfinance

http://www.indiamicrofinance.com/microfinance/private-equity-microfinance/pe-fund-inflow-to-indian-microfinance-sector-grows-242.html