Now that three years have passed since CGAP and the Center for Financial Inclusion (CFI) at Accion published “The Art of the Responsible Exit in Microfinance Equity Sales,” this subject deserves a re-visit and perhaps expansion of the paper’s general principles into industry guidelines.
As the financial inclusion and impact investment industries mature and grow, so does the issue of how investors committed to advancing financial inclusion can “exit responsibly” from the institutions in which they invest equity. Sometimes an exit will raise no debate, such as when the sale is to another mission-led investor with clear intentions to continue the work of the exiting stakeholder. However, there is increasing concern about mission drift as investments mature, exits become more common and the pool of well-capitalized social investors remains small. What, if anything, does an exiting investor owe to an investee or its clients to ensure the new investor is the right “fit” for helping the investee meet its social goals?
As Alex Silva of Calmeadow and Jeffrey Riecke of CFI note in a recent blog entry, investors exit for many reasons: a market may start to attract fully commercial capital; an investor’s strategy might change; a market may become too risky; or an investor may need to raise capital.
The seller and purchaser typically will have a variety of obligations to satisfy. Their fiduciary responsibility to their shareholders may be inconsistent with the needs of end-clients. There may be tradeoffs relating to timing, size of the stake, where the investee is in its life cycle, and the ownership structure and governance arrangements in place. As Mr Silva and Mr Riecke put it, exiting investors “should not sell to the high-priced but questionable offer, and neither should they opt for capital-starved social investors.”
This is tricky stuff. Despite the valuable contributions of the CGAP-CFI paper, there is room for expansion, including gathering industry input to create exit guidelines for financial inclusion equity investors.
To this end, the European Microfinance Platform (e-MFP), the NpM Platform for Inclusive Finance and the Financial Inclusion Equity Council (FIEC) have commissioned a paper to synthesize stakeholder input on the subject. Authored by Daniel Rozas of e-MFP and Sam Mendelson of Arc Finance, the paper will be based on interviews with investors and supplemented by case studies. In addition, the authors welcome your input. They intend to have a draft ready for European Microfinance Week in November.
Briefing papers are mainly valuable if they produce concrete outputs. The goal of this paper is for FIEC members and other equity investors to use it in briefing organizations that assist them in exit trajectories (such as investment banks and consultants) and helping potential buyers better understand their own commitments to determine whether the proposed investment is truly a match. Most of all, the paper is meant to move the industry toward the establishment of best practices that improve the enabling environment for responsible equity exits. To paraphrase the authors of the 2014 paper, exiting responsibly may be an art, but it can also become more of a science.
This interview is part of a sponsored series on European Microfinance Week, which is held annually by e-MFP. MicroCapital has been engaged to promote and cover the event on-site.
Sources and Additional Resources
European Microfinance Week 2017
MicroCapital Coverage of European Microfinance Week Since 2012
European Microfinance Platform (e-MFP) Coverage of European Microfinance Week 2016