Microfinance Equity Investments showing high performance: WSAS Index

Microfinance Focus, July 23, 2010: Witnessing an unprecedented level of growth, the microfinance sector is increasingly attracting the interest and investment of equity investors world over. According to a recently released ‘Microfinance Institutions Shareholder Value Index 2006’ (WSAS MFI SVIX) by Wall Street Advisory Services, the sector has posted a 148% increase (in US$ terms) in the shareholder value of equity investments made in 29 microfinance institutions from 19 countries over the three-year period ending 2008.

The Index shows that the single-largest increase in IV ’06 value was for SKS Microfinance Ltd. (India), a staggering 3-year cumulative increase of 2,566% (a 199% CAGR). The simple average 3-year cumulative change in IV ’06 shareholder value was about 182%. Leaving out the spectacular SKS Microfinance gain and the three losses, the simple average was 113%. 

The single-largest IV ’06 in the MFI SVIX 2006 was from Financiera Independencia (Mexico), at 30% of the index’s shareholder value at the start of the series in 2005, and it produced a cumulative 214% increase in IV ’06 shareholder value, due largely to the sell-out proceeds realized during 2008. This sell-out removes Mexican representation from the MFI SVIX 2006 from 2009 forward.

However on the downside, the Shareholder values decreased over the period for K-Rep Bank (Kenya) by -26%, for Tameer Microfinance Bank (Pakistan) by -32%, and for the new IV ‘06 of PNG Microfinance (Papua-New Guinea) by -66%.

Two other MFI SVIX 2006 constituents saw their IV ’06 investors’ sell-out during 2008 – Peru’s Bco. del Trabajo (via a trade sell to Scotia Bank, producing a 3-year increase of 210%), and Uganda Microfinance Ltd. (via a trade sale to Equity Bank Kenya, producing a 3-year increase of 335%).

The Composite Index result show that throughout the period, MFI SVIX 2005 represents around 80% of the Composite’s shareholder value. India had the largest number of MFI Investor Vintages represented (8), followed by Peru (7), Cambodia (4), and Mexico (3), while 7 countries had 2 IVs represented, among 59 Investor Vintages from 51 MFIs. Indian MFIs produced some spectacular gains for investors of 2005 and 2006 (largely from capital expansions at high multiples to book values), but typically from low US$ starting points.

By the end of 2008, the combined book values of the Composite’s 59 IVs represented about US$ 1.34 billion, up from 2005’s combined book values of US$ 0.61 billion. Since period-end book value represents money still invested in the MFIs, it is a measure of ‘money-at-risk’, and it is the best measure of index diversification. The top five countries in this regard at the end of 2008 were Mexico (18%), Kenya (14%), Peru (10%), Cambodia (7%), and Bulgaria (5%), for a combined 54% share of book value. This was very similar to 2005’s 56% share by the same 5 countries, though weights shifted significantly in some cases (Kenya up from 4.5% to 14%, Mexico down from 26% to 18%, for instance)

WSAS uses “Shareholder Value” in the classic sense, as a measure of financial value. It considers the total accumulation of value (or loss) an investment generates for investors. For Index purposes, “Shareholder Value” can be summarized as the cumulative result of the cash flows which equity investors in an MFI experience in a period, with book value owned at the end of any particular period as the ‘terminal value’ for the period.

In the context of the principally private equity investing approach used for MFI investment, equity investors’ outflows consist of Initial negotiated buy-in prices, and subscriptions to capital increases, typically rights issues for current shareholders or capital expansions, but also negotiated purchases from other current shareholders representing shifts in ownership between Investor Vintages.

Equity investors’ inflows are determined by cash received as cash dividends, increases (losses) in their share of the company’s book value arising from net income (net losses) from MFI operations, increases (losses) in the value of their share of the company’s book value arising from dilution of their ownership from new issues of shares and proceeds arising from sales of their equity positions (usually negotiated and frequently not publicly disclosed) when no new shares are issued. Such transactions are often called “secondary sales”.

The WSAS MFI SVIX results approximate what investors achieved in the past, and provide the basis for accumulating historical performance characteristics of the niche asset category, MFI equity. The WSAS MFI SVIX Composite shows a 4-year, 295% cumulative increase in shareholder value in US$ terms from the blended results of the MFI SVIX 2005 and 2006 investor groups. The combined end-2005 equity capital of the two sets of Investor Vintages (MFI SVIX 2005 and 2006) making up the WSAS MFI SVIX Composite, at US$ 608 million, represented about 32% of that of the 378 MFI universe’s US$ 1,917 million in book value.

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