The Indian microfinance sector is starting to attract private equity groups and hedge funds after a series of high-profile deals cast the sector in a different light from its charitable origins.
Leading Indian microfinance groups, such as SKS Microfinance, Share, Spandana and Basix, make small loans of typically less than $100 to the poor and, until a few years ago, were largely viewed as a destination for charitable donations rather than serious investment.
However, this week, Indian and foreign investors interested in investing in the fast-growing sector have met about 40 microfinance institutions at an inaugural microfinance investment fair in New Delhi.
Private equity investors’ entry into the field follows that of big banks such as ICICI of India, ABN Amro, Standard Chartered and Citibank, which have in recent years greatly increased the capital they give to microfinance institutions.
The heightened interest in India, one of the largest microfinance markets, comes after a flurry of deals, which included Sequoia, the Silicon Valley venture capital company that backed Google, investing $11.5m in SKS Microfinance this spring.
“There is huge commercial interest in the sector,” said Vikram Akula, SKS chief executive. SKS has been approached by about 20 private equity funds and even hedge funds, he added.
The number of microfinance borrowers in India reached 36.8m, according to a report from the Ford Foundation, the Swiss agency for development and microfinance advisory access. Outstanding loans distributed by Indian microfinance institutions increased 76 per cent to about $766m in 2006-2007. Repayment rates of about 98 per cent have created confidence in the business.
Dubai-based Legatum Capital this week announced it would pay $8.4m for a minority share in Intellecap, an Indian adviser that focuses on microfinance.
Legatum this spring paid $25m for a majority stake in Share, as well as $4.5m for an undisclosed interest in Fino, maker of microfinance technology, such as Smart cards and card readers.
Legatum hoped that its investments would “send a powerful signal to other equity investors that the microfinance industry is worth looking at”, said Mark Stoleson, the president.
US-based Unitus Equity Fund (UEF), whose partners include the investment company of Ebay founder Pierre Omidyar, invested $500,000 in SKS last year and this year closed a $23.4m fund devoted to microfinance in Asia and Latin America.
Chris Brookfield, UEF director, said the fund would be making more investments in India soon.
Sequoia will focus on its investment in SKS but anticipates others will enter the fray. “It may not be us but you will see a lot more investors coming in,” said Sumir Chadha, managing director of Sequoia Capital India.
But he warned: “Now there is so much euphoria around microfinance, many companies expecting overnight success will probably be disappointed if they have these expectations.”
Apart from India’s biggest leading microfinance companies, many fledgling groups lack the experience to prepare for investment, said Vipin Sharma, chief executive of Access, a sector adviser formerly part of humanitarian organisation Care. Access has been working with small microfinance companies to develop business plans and help woo investors at Thursday’s conference. But the possible entry of private equity players has raised questions about how this could alter microfinance’s original mission of uplifting the poor.
Vijay Mahajan, chairman of Basix, pointed out that this year’s flotation of Mexican microfinance group Compartamos had made its founders millionaires. “Presumably, this will attract more capital, but on what terms to the ultimate users? Is this what we set up this sector for?” he told the magazine Microfinance Insights.
