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Equity Investments by the
Venture Capital Funds
Fund invests equity in MFIs around the world. Unitus Inc. provides capacity building support
and grant money. In its partners therefore it has shown a distinct preference for MFIs that
offer the prospect of rapid growth. It is well-endowed with grant money for TA for CB. However
it is flexible about the period in which its TA partners should transform into NBFCs as potential
candidates for its equity investments. In September 2005 it announced an alliance with
ACCION for Indian operations and the two organizations have set up offices in the same
building in Bangalore (see also Chapter 6). However neither organization will limit its operations
to joint-partnerships since they define their primary goals differently. Unitus has made two
investments in India so far. 9
MSDF is not a VCF, but a Foundation, dedicated to improving the lives of children around the
world. In India it sees an opportunity to do so by promoting urban microfinance, primarily in
the slums of the six largest cities, in which an estimated seven million children live, and where
little or no microfinance services exist so far. Microfinance is expected to help families develop
the economic security to provide for and educate their children.
MSDF hopes to achieve this vision by catalyzing the development of scalable and sustainable
start-ups through direct investments, targeted capacity building, and attracting top quality
new leaders to the sector who "combine world-class management skills with the vision for
massive social impact". Moreover, as a Foundation, it is in a particularly good position to add
value to the market by providing grants to non-profits, not just for CB but for working capital
to bring them to the point where they can attract equity investments, either from MSDF itself,
or the other players. Thus MSDF has made a grant of the equivalent of $600,000 to Swaadhar,
an urban start-up in Mumbai to carry them to break-even in about 3 years. 10 It expects half of
its partners to be non-profits each year. However it expects them to aim at attaining exactly
the same standards of governance and data driven management as its for-profit partners. It
places particular emphasis on integrating social performance measurement into MFIs from the
beginning, and to stimulate the creation of new kinds of lending for education, health,
infrastructure and market-based services for micro-entrepreneurs.
Issues
Catering to the equity requirements of small MFIs: a task
for MFDEF
While the equity requirements of the for-profits and of non-profits with the intention to
transform are being catered to by the new VCFs, the segment that is still neglected is the notfor-profit
segment of MFIs registered as NGOs who are not in a position to transform, or
indeed who may not want to transform. As discussed earlier there is need and scope for
diversity in Indian microfinance and small not-for-profit institutions have a strong role to
play in decentralizing coverage to underserved regions. While their main need is for credit
funding rather than equity, all segments of the sector are highly leveraged and many of them
find it hard to raise the next loan. In the M-CRIL sample 31 per cent of the total equity
requirement for growth came from small MFIs with a portfolio size of less than Rs 1 crore, and
another 33 per cent from medium MFIs, mostly NGOs, with portfolios of between Rs 1 and 10
crore. Moreover the growth equity requirement from those MFIs in these two categories with
negative or inadequate CARs was 39 per cent of the total. Thus there is a both scope and need
for equity financing for these segments from MFDEF.
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MSDF is not a
VCF, but a
Foundation,
dedicated to
improving the
lives of children
around the
world. In India
it sees an
opportunity to
do so by
promoting urban
microfinance,
primarily in the
slums of the six
largest cities,
in which an
estimated
seven million
children live
While the
equity
requirements of
the for-profits
and of nonprofits
with the
intention to
transform are
being catered
to by the new
VCFs, the
segment that is
still neglected
is the not-for
profit segment
of MFIs
registered as
NGOs who are
not in a
position to
transform, or
indeed who may
not want to
transform