India: Blackstone, Carlyle eye microfinance

Oct 2007
New Delhi, India, October, 11 2007 - The private equity interest in microfinance is reaching a crescendo with heavyweights such as the Blackstone Group and the Carlyle Group willing to invest in the sector. A source close to the development has said that both these groups have shown interest in putting money into MFIs.

The quantum of investments may be upwards of $20 million. It is not yet clear in which of the organisations, will these companies be investing in.

“They are keen on making huge investments , but they are yet to decide on the MFIs. Since most of the big MFIs are saturated with funds, they may need to look at multiple investments in smaller MFIs,” the source said. There nearly 15-20 serious funds in the sector , but very few look at tier 2 and 3 categories of MFIs. While the Blackstone group refused to comment, spokesperson at Carlyle was unavailable for comment.

“PE investors look at hard growth numbers and these organisations throw up incredible growth figures, year after year. With a CAGR of 100%, this sector is very attractive ,” he added. Of the 200 odd MFIs in the country, only the top 10 corner for most of the funds. PE investors find it a daunting task to zero in on credible investments.

A Senior Investment Analyst, at Blue Orchard , a Swiss company that specialises in microfinance investment products, who did not wish to be identified said “India is a mass market. There is tremendous interest here. The challenge is to figure out middle tier MFIs.

Due diligence becomes important. We would look at MFIs with at least $1 million in assets and which have been around for 3 years. They also need to have audited results and credible ratings. There is an entire spectrum of PE interest with different profiles, driven by both commercial and social considerations in varying proportions.”

Blaine Stephens, director of analysis, of Microfinance Information Exchange (MIX) Market, a Washington-based organisation, “The leverage ratios here are as much as 18-19 times, compared to other South American markets where it is limited to 4 times at the most. Commercial debt and managed portfolios fuelled growth in lending among leading Indian MFIs, leaving no capital cushion and creating unparalleled leverage.”

The sector has already witnessed one of the biggest PE investments in the world. Recently private equity group Legatum and Aavishkaar Goodwell have partnered to invest $25 million capital in a micro-finance group, Share. California-based venture capital group Sequoia and Unitus, the Seattlebased company that lends to and invests in MFIs, have ploughed $11.5 million into SKS Microfinance.

According to a report,’State of the Sector’ released at the Microfinance India summit earlier this week, “The pressure to maximise returns by the new PE investors is unlikely to result in upward pressure on interest rates, although it could dampen the decline of rates that should come with further growth.

The pressure to maximise returns is likely to take the form of the desire to reach massive scale.” The estimated annual requirement is Rs 1,35,000 crore of credit for the under banked population, of which only 5% of the demand is met.

The report however raises questions about the quality of growth, with MFIs witnessing a rush to grow. The report anticipates large investments by private equity, with the possibility of IPOs.


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