Microfinance and Capital Markets - Council of Microfinance Equity ...

OVERALL CONCLUSIONSOur conclusions are straightforward and simple: four excellent MFIs decided for theirown reasons to issue an IPO or list on their domestic capital markets and, in two cases, toalso raise funds from institutional investors internationally. The industry has been movingin this direction for some time. We have tried to demonstrate in the first section of thispaper how excellent these institutions are. It is that excellence in management,governance, systems and technology, methodology and product line that has allowedthese institutions to achieve massive outreach to the lower-income segments and yetremain highly profitable at levels that most banks would envy.As public institutions and regulated banks, these institutions are now being benchmarkedagainst the banking sector in their respective countries. As successful as they have been,rapid growth brings problems. Each of these institutions will need to face a series ofissues to continue to be among the best. However, given the quality of their management,we assume they will address those concerns.Going public is not a spur of the moment decision; it is very costly. Preparing theinformation, data, audited financial statements required for due diligence by an advisor,prospectus and a package for institutional investors is a time absorbing and costly event.The “road shows” to visit with potential investors are also demanding and costly as arethe legal, audit and financial advisory fees. An MFI has to think carefully through thedecision to go public. However, there are clear advantages—the ability to raise capitalfrom an alternative source, to provide incentives for management and staff, to allowpartial or complete exits by equity investors in these firms, to raise capital for technologyinvestments and branch expansion, and eventually, but not yet a use of proceeds, toacquire or merge with other MFIs.Interestingly, three of the MFIs that have gone public have had strategic equity investorsand several have received extensive external technical assistance to reach their presentlevel of excellence. Equity Bank has recently concluded a deal, subject to regulatoryapproval, to sell a 25% interest in the bank to a private equity firm, post its listing, at aprice reflecting its recent trading price, considerably in excess of the listing price. Thebest structure and sequencing seems to be the combination of the two—a strategicinvestor followed by a listing/ IPO. Though, Equity Bank attracted strategic investorsboth before and after its listing. One thing is clear—the strategic international investorgives the market an added measure of confidence, which is important for an IPO in asector that up to now has little comparable experience for the institutional investors in themarket to analyze.Each institution’s shares have performed well in their respective capital markets; wecould perhaps call it a bit of “irrational exuberance.” However, it is still early, and wewill see how the shares perform over time. Companies that have a social mission and areprofitable have a certain cachet as does the microfinance sector for the moment. Wewould expect that trend perhaps to strengthen in time. The initial success of the IPOs has40