Trends in Microfinance Investment Microfinance Club of New York April 12, 2012 Basic definitions 2 Microfinance Microfinance is the provision of basic financial services such as microcredit, savings, money transfer services and micro-insurance to low-income individuals or to those who have limited access to financial services. Transaction amounts are comparatively small. Microcredit Microcredits are loans for productive purposes, whose lending decision is not predominantly based on collateral and are small in size (less than 2x GDP per capita). Microfinance Institution (MFI) An MFI is an organization that provides microfinance services and whose lending operations are mainly microcredit. Microfinance Investment Vehicle (MIV) MIVs, also known as microfinance funds, are entities that invest in MFIs. For a fund to qualify as an MIV, it must meet the following criteria: 1) The investment vehicle must be an independent legal entity (i.e. independent of the MFI being funded); 2) Multiple private investors must be present, or the vehicle must be open to such investors; and 3) The investment vehicle must focus on investing in microfinance © Copyright MicroRate 2012 3 Foreign Investment Flow Investor / capital markets MIV MFI Micro Entrepreneur MicroRate Vision Promote the flow of funds from capital markets to microfinance by increasing transparency and growth in the global microfinance community. © Copyright MicroRate 2012 4 MIV Growth (in USD millions) $7,000 $6,452 $6,023 $6,000 $4,931 $5,000 $4,781 $4,246 $3,864 $4,000 $3,814 $3,053 $3,000 $1,964 $2,000 $1,476 $1,195 $1,000 $705 $2005 2006 2007 Total MIV assets (US$) © Copyright MicroRate 2012 2008 2009 Microfinance Portfolio (US$) 2010 5 Foreign Funding of Microfinance Private Investors Public Investors 42% 45% 46% 55% 51% 49% 51% 49% 2005 2006 58% 54% 55% 46% 2007 2008 2009 2010 Source: CGAP © Copyright MicroRate 2012 6 Regional Distribution of MF Assets $6,000 Other $5,000 Middle East & North Africa North America $4,000 Sub-Saharan Africa $3,000 East Asia & Pacific $2,000 South Asia $1,000 Latin America & Caribbean Europe & Central Asia $- 2005 © Copyright MicroRate 2012 2006 2007 2008 2009 2010 7 Growth in MIVs 120 102 100 88 80 70 74 61 55 60 40 37 20 0 2004 © Copyright MicroRate 2012 2005 2006 2007 2008 2009 2010 8 MIV Clients Luminis-listed MIVs 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Accion International* Advans SA* Alterfin cvba ASN-Novib Fund Bamboo Finance* BlueOrchard Finance SA* Calvert Social Investment Foundation* Caspian Adviors* Consorzio Etimos* Deutsche Bank* Dual Return Funds* DWM Asset Management* European Fund for Southeast Europe* Grassroots Capital* Gray Ghost Ventures* Impulse Microfinance Investment Fund Incofin cvso KCD Mikrofinanzfonds* Luxembourg Microfinance Development Fund Locfund Microvest I, LP MicroVest Short Duration Fund © Copyright MicroRate 2012 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. MicroVest+ Plus Fund responsAbility Global Microfinance Fund FCP responsAbility SICAV Microfinance Leaders Fund responsAbility SICAV - Mikrofinanz Fond Rural Impulse Fund Rural Impulse Fund II S.A. Selectum SICAV SIF* Shorecap* SNS Institutional Microfinance Fund I SNS Institutional Microfinance Fund II Triodos Microfinance Fund Minlam Microfinance Fund* TreeTops Capital* Wallberg Global Microfinance Fund* MFX counterparties 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. * MicroRate and MIV are currently in discussions 17. 18. 19. 20. ASA International ASN-Novib Fund Alterfin cvba Banco Solidario S.A. BlueOrchard Foreign Exchange Fund BlueOrchard Microfinance Growth Facility Calvert Social Investment Foundation Community Needs, LLC Deutsche Bank Micro Credit Development Fund Developpement International Desjardins Dexia Micro-Credit Fund FEFISOL FINCA International FINCA Microfinance Holdings Gawa Microfinance Fund I Impulse Microfinance Investment Fund Incofin cvso LOCFUND Luxembourg Microfinance Development Fund MicroCredit Enterprises 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. Microvest I, LP MicroVest Short Duration Fund MicroVest+ Plus Fund Opportunity International responsAbility Global Microfinance Fund FCP responsAbility SICAV Microfinance Leaders Fund responsAbility SICAV - Mikrofinanz Fond responsAbility SICAV Financial Inclusion Fund Root Capital Rural Impulse Fund Rural Impulse Fund II S.A. Solidarite Internationale pour le Developpement et l’Investissement Stichting Hivos-Triodos Fonds Stichting Triodos-Doen Triodos Fair Share Fund Triodos Microfinance Fund Unitus Incorporated 9 MIV Peer Groups Securities type Debt Hybrid Equity Other considerations: Tier 1 Tier 2 Tier 3 MFI maturity © Copyright MicroRate 2012 1. Closed vs. open-ended 2. Leveraged vs. unleveraged 10 2010 Key MIV Metrics Best Average Worst 1-year return 39.1% 6.5% -0.4% 3-year return (annualized) 24.4% 7.8% 2.0% 5-year return (annualized) 10.4% 6.4% 3.2% 1.8% 3.9% 11.5% 10.0% 3.1% -10.4% 11 months 26 months 51 months Portfolio quality (weighted average) α- β β- Sovereign risk (weighted average) BB BB- B - 1.6x 38.3x 6.4 4.4 2.1 11 4 1 Total expense ratio Return on assets Loan duration (weighted average) Leverage Social dollar index Portfolio manager tenure (years as PM @ MIV) © Copyright MicroRate 2012 11 MIV metrics Methodology to track and compare MIVs: PRSM™ PERFORMANCE • Performance ratio analytics • NAV returns • Comparisons to peer group and target return • dividend, coupon yields • Earnings analysis • Expense metrics © Copyright MicroRate 2012 RISK • Portfolio quality • Sovereign risk • Credit risk • Concentration risk • Asset-liability management • liquidity • Market risk • currency risk • interest rate risk • Leverage • Structural risks SOCIAL • Social mission definition • Corporate responsibility • adherence to ESG principles, CPP, PIIF, etc. • Social performance management • linkage of mission to investment process • tracking & enforcement • Social results – outputs and outcomes MANAGEMENT • Portfolio manager experience, track record • individual • firm • Governance and internal controls • Investment process • Risk management MIV Data & Results 2011 preliminary findings 12 Performance Results still coming in for 2011, but initial indications suggest improvements over 2010 due to increased demand from MFIs (higher asset utilization) and lower cash balances. Competition from local banks still hindering pricing, especially with the rise of local currency funding, the cost of which eats into the MIV’s margin. Many MIVs looking outside microfinance to find returns, with much focus on SME finance (pre-export, trade, fair-trade, agriculture, factoring, etc.). © Copyright MicroRate 2012 13 Diversity of MIVs MIV #2 MIV #1 Regional Diversification 7% 18% MIV #3 Regional Diversification Middle East & North Africa Regional Diversification 5%4% 6% Sub-Saharan Africa 25% 28% South Asia 42% East Asia & Pacific 33% 6% 11% 58% Latin America & Caribbean 55% Europe & Central Asia Other MFI Maturity MFI Maturity MFI Maturity Most Mature Most Mature Most Mature Mature Mature Mature Least Mature Least Mature Least Mature 20% 40% 60% 0% 80% 40% 60% 80% 0% 20% 60% 40% 20% 0% Low 40% 60% 80% Percent of Portfolio Credit Risk Percent of Portfolio Percent of Portfolio Credit Risk High Moderate © Copyright MicroRate 2012 Risk 20% Percent of Portfolio Percent of Portfolio Credit Risk 60% Percent of Portfolio 0% 40% 20% 0% 60% 40% 20% 0% High Moderate Risk Low High Moderate Risk Low 1901 N. Moore Street, Suite 1004 Arlington, VA 22209 United States www.microrate.com info@microrate.com Tel. 703-243-5340 Fax: 703-243-7380 www.luminismicrofinance.com luminis@microrate.com