Akhand Tiwari and Michael Chasnow, IFMR Centre for Microfinance’s co-authors, provide an in-depth look at an acquisition in Indian microfinance: Sonata Finance’s purchase of Jeevika Livelihood Support Organization’s microfinance operation in August 2007. The Institute for Financial Management and Research (IFMR) Centre for Microfinance was established in 2005 with the objective to improve the accessibility and quality of financial services for the poor through research, knowledge dissemination and evidence-based policy for MFIs. This paper explores the acquisition and insights it may have for other microfinance practitioners.
The 28 page report notes that as the global financial crisis continues to constrain funding and hamper liquidity in the Indian microfinance sector–the industry is likely to experience an increase in consolidation. In the co-authors’ view, the Sonanta-Jeevika acquisition provides teaching points for different players in the microfinance sector. In regards to private equity’s role in encouraging such acquisitions, the co-authors believe that an MFI acquisition would increase the value or growth potential of an NBFC (non-banking financial company). Microfinance institutions (MFIs) typically seek an NBFC status in order to obtain wider access to funding, including bank finance.
According to Tiwari and Chasnow, while Sonata’s acquisition of Jeevika’s MFI operations is the first of its kind in Indian microfinance, the transaction “demonstrates that acquiring a well-run microfinance operation (outside of an MFIs current area of operation) can propel future growth.” The acquisition consisted of Sonata Finance (an NBFC) purchase of Jeevika’s (a non-profit MFI) loan portfolio. Although Sonata is registered as a (NBFC), senior management at the company had 10 years of previous experience at Cashpor, an Indian MFI. Previously, Sonata did not have an operation in microfinance.
The Bellwether Microfinance Private Equity Fund also played a key financing role in the acquisition as it was a majority shareholder of Sonata Finance. Initially, Jeevika approached Bellwether for the purpose of seeking additional funding to grow their microfinance operations and explore becoming a NBFC. After further analysis, Bellwether determined that it would not make sense to directly invest in Jeevika as its “small portfolio and conservative growth plans resulted in a very low capital requirement.” In addition, “to receive commercial equity, Jeevika would need to go through the time-consuming red-tape-laden process of becoming an NBFC.”
Thus, Bellwether approached Sonata Finance (an NBFC) to determine if the company would help mentor and assist Jeevika in some of their operational challenges and the NBFC licensing process. After lengthy discussions, Bellwether’s investment committee and Sonata determined that it would financially make sense if Sonata purchased Jevvika’s loan portfolio and have Jeevika skip the NBFC licensing process. Thus, “Bellwether would channel the equity Jeevika required through Sonata.” The fund saw value in the acquisition of Jeevika’s loan portfolio with the criteria that the portfolio had the following qualifications:
- Strong Senior Management
- Experienced Staff
- A Quality Portfolio
- Strong Customer Base in a given District or City
Post merger figures illustrate that Sonata’s operations grew with their active loan client increasing from 1,760 (March 2007) to 15,825 by November 2008. In addition, their outstanding loan portfolio increased from USD 115,000 to roughly USD 1.43 million. Since the acquisition, Sonata’s loan portfolio has grown by 450 percent by November 2008. The report does not provide additional information as to whether this increase resulted from internal growth. The benefits enjoyed by Sonata were its ability to strengthen its senior management and expansion into a neighboring state of Madhya Pradesh, India while skipping steps in the growth process.
In order to provide a balanced perspective/assessment, the report also presented the benefits and drawbacks from Jeevika’s perspective learned prior to the acquisition:
Benefits for Jeevika:
- Expanding senior management team
- Receiving NBCF status through being acquired by Sonata
- Operations support
- Re-alignment of Jeevika’s mission
Possible Drawbacks for Jeevika:
- Employee sentiment regarding the acquisition
- Mr. Gupta’s (Executive Director of Jeevika) concern for his ability to continue to innovate and implement new ideas as part of Sonata’s new management team.
The report continues to provides a template of actual pre-merger requirements between Jeevika and Sonata such as: valuation, legal process between two acquisition types (loan portfolio purchase vs. acquiring another NBFC), funds, operations, accounts, human resources, a strategic approach to the integration and possible barriers to entry when forming a successful partnership.
Furthermore, merging with a NBFC could prove beneficial if the non-profit MFI is experiencing difficulty obtaining additional funding or concludes that rapid expansion into a new state would prove to be the best move. The challenge is finding the right NBFC partner that would align with an MFI’s mission. There is also the challenge of integrating operations as NBFCs accounting and reporting standards are different from MFIs. Tiwari and Chasnow note that, more often than not, NBFCs pursue clients and partners to take over rather than forming joint partnerships.
By Zoran Stanisljevic
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