NB Financial Innovation
A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?
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.
But last year, two Indian MFIs, Equitas Holdings and Ujjivan Financial Services, had successful IPOs that have garnered a much more positive reception in the financial inclusion community – while also bringing in some major funding. We spoke with Daniel Rozas of the European Microfinance Platform and Anna Kanze of Grassroots Capital Management about how these four offerings differed, and what these differences could mean for the future of public investment in microfinance. You can listen to the interview in the podcast above, and the excerpts below give a sense of the conversation. And on Monday, Jan. 30, we’ll be discussing these topics in more depth in NextBillion’s first Twitter chat, featuring Kanze, Rozas and Microfinance Transparency founder Chuck Waterfield – join us at 10:00 AM EST at #MFICHAT.
According to Kanze and Rozas, the first big difference between the two sets of IPOs was their motivation. As Rozas described it, one of the explicit goals of these early IPOs was based more on public relations and industry-wide strategy than on business need: to demonstrate the attractiveness of microfinance as an investment. “Yes, they needed capital to grow, and yes, they were of the size at which point an IPO was a logical way to get that capital. But in the case of Compartamos, if I remember right, I don’t believe they were actually raising any capital at all. It was just a vehicle for existing investors to exit and sell their shares. In the case of SKS, they were both raising capital and providing an exit for existing investors. And a lot of this was framed in the way of bringing the commercial market to microfinance, and saying this was a major milestone in the development of the sector.” On that count, he said, the IPOs were a success. “If you look at microfinance in Mexico after the Compartamos IPO, it exploded. There were lot of new entrants who came in, a lot of big money started new MFIs.” But unfortunately, along with this new money came new pressure to deliver returns – and not just among SKS and Compartamos.
In contrast, Kanze said, Equitas and Ujjivan took a lower-key, socially focused and business-driven approach. They had a mix of social investors and more traditional private equity investors, and “they made it very clear that their social mission was core to their companies’ operations and their corporate culture – I think all their investors knew that going in. … Just comparing Compartamos and SKS to Equitas and Ujjivan, the latter were under two times book value, where Compartamos was close to 13 times book value, and SKS was four times. So that’s to say that the Equitas and Ujjivan prices were a little bit more reasonable, indicating that they wouldn’t be growing uncontrollably, or maybe charging high rates to their customers to create these profits that were unsustainable.”
Rozas and Kanze agreed that the impact of the Compartamos/SKS IPOs continues to shape the industry’s approach to public investment – indeed, as Kanze pointed out, the Andhra Pradesh crisis led to the new regulatory framework and credit bureau infrastructure in India that made the Equitas/Ujjivan IPOs possible. But Kanze warned against complacency: “I would caution against relying too much on regulations and credit bureaus. High growth is happening again in India in certain pockets, and I’m sure these IPOs and the positive reaction will probably lead to more IPOs. So it’s important to be vigilant and to continue the focus on the social mission.”