India: Private Equtiy Funds Woo Micro-Finance Firms to Create Long-Term Value

Oct 2012
India, October, 05 2012 - Private equity funds are chasing India's microfinance companies despite dipping returns on equity, as they now seek long-term value from MFIs' extensive reach instead of short-term gains.

As the central bank's prudential norms begins to bite, MFIs are looking to reduce cost with intense IT use and explore different avenues to increase revenue and these suit long-term investors well.

Overseas investors are more confident now about the long-term prospect of local microfinance companies after the Reserve Bank of India intervened and tried to bring balance after the liquidity crisis in the sector in 2010-11.

Chicago-based Creation Investments Capital Management are among the latest entrants in the Indian MFI market while International Finance Corporation and the Michael & Susan Dell Foundation are raising exposures.

Sources in the investment banks said at least four to five MFIs are in advance stages of raising capital from PE funds and the total deal size could be anywhere between Rs 180 and Rs 200 crore.

"Despite the turmoil in the microfinance industry in India for the past couple of years, we have remained positive on the sector," Creation's chief investment officer Ken Vander Weele said last month after taking its maiden exposure here.

The firm has invested Rs 29 crore in Allahabad's Sonata Finance last month and plans to raise its holding via an outright share purchase from existing holders, industry sources said.

IFC, the World Bank's private equity arm, has proposed to invest Rs 100 crore in Chennai-based Equitas Holdings while it has just put in Rs 45 crore in Bangalore's Ujjivan Financial Services. The Michael & Susan Dell Foundation has raised its stake in Sonata.

"To remain attractive to investors, MFIs would need to become much more cost efficient through technology intervention and look at alternative avenues of revenue generation by utilising their strong distribution network," said Abhijit Ray, director at Unitus Capital, which helps small clients raise funds.

MFIs are on equity chase even as RBI's new directive to cap margin at 10 per cent is likely to reduce profitability for many. A 10 per cent margin cap means that the companies need to reduce operating cost below 10 per cent to make profit.

The Malegam Committee on MFI defined margin as the difference between the lending rate and cost of borrowing. Bandhan Financial Services, the country's largest MFI by assets, said it will consider raising fresh equities as it aims to grow by about 35 per cent this year.


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