Passing the Baton – but to Whom? Considerations for Investors

> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

You may have noticed an uptick in headlines over the past few months announcing the selling of microfinance equity shares. Here are a few examples:  Accion sells 15 percent stake in Paraguay’s El Comercio to Incofin’s Rural Impulse Fund; Grupo ACP sells its 60.68 percent stake in Peru’s MiBanco to Edyficar; Triodos sells stake in Cambodia’s ACLEDA Bank to ORIX Corporation.

Expect to see more such headlines, as the number of exits from microfinance equity investments is anticipated to accelerate in the next couple of years as a result of a combination of different factors:

  1. Equity funds are maturing. Many funds were created around the same time and while some have no official time horizon, even patient capital reaches a point when it is time to consider moving on.
  2. Microfinance institutions (MFIs) are also maturing. Thanks to the patient capital and expertise of many initial microfinance investors, some MFIs are now so large and sophisticated that they need new investors with deeper pockets and different expertise to further their growth and development.
  3. Social investors are moving into new frontiers. Some social investors are reevaluating where their equity funding and participation can have the biggest impact, for example by moving into more rural or poorer countries. In a number of countries, regulatory environments are becoming friendlier to foreign microfinance investors now that they have a more proven track record.

Given that many social investors are seeking to pass the baton, what does it mean to exit an investment responsibly?

The freshly released paper, The Art of the Responsible Exit in Microfinance Equity Sales, dissects exactly this question. The paper, a joint effort of the Center for Financial Inclusion at Accion (CFI) and the Consultative Group to Assist the Poor (CGAP), shares the thoughts and experiences of 50 investors and industry stakeholders on the topic of exiting an investment in a “responsible” manner.

What did we uncover?

At first, there were more questions than answers. What does “responsible” even mean? Is it responsible to sell to a buyer with no social mission? At first blush, most social investors would prefer that their successors maintain the commitment to mission. But what if a purely commercial buyer pays a high price, allowing the seller to redeploy those funds into regions and institutions where they are more needed? And what if the proposed buyer has the exact expertise and resources needed to help the institution grow to the next level, reaching more clients? Is this sale good for the institution, the industry, management, and the other investors? There are lots of shareholders and factors to consider, and often, many shades of grey and tradeoffs to be made.

Several themes emerged from the research. For instance, when considering a buyer, almost all social investors insist on a commitment to responsible behavior and most prefer to continue the social mission of the MFI. Potential buyers are generally dismissed if they don’t have a “baseline of socialness” (e.g. endorsement of the Smart Campaign and willingness to implement the client protection principles). There are also ways to ensure the continuation of the social mission. Exiting investors can bake language into the shareholders agreement to protect the mission and ensure that all future investors also have to sign that agreement. These and other mechanisms discussed in the paper were employed by the majority of the investors interviewed to make sure the social mission would live on at the MFI.

The importance of process, timing, and communication also emerged as key themes in the paper. Many interviewees strongly stressed the necessity of thinking about, planning, and communicating your intended exit and timeline before even making an initial investment. On the other side of the deal, the actual logistics of exiting often prove time consuming in terms of navigating legal systems and regulatory bodies, and exits can become especially challenging to execute when factoring in the rights of other shareholders.

Another theme explored in The Art of the Responsible Exit in Microfinance Equity Sales is the different expectations of private microfinance investment intermediaries (MIIs) versus development finance institutions (DFIs) when exiting an investment. DFIs are publicly funded with explicit development mandates. Given their public funding and mandate to provide patient capital, DFIs have additional responsibilities to the larger industry in terms of ensuring market development. DFIs are meant to “crowd in” private investments, and when, and how a DFI exits can send important signals to local or more mainstream investors and indeed to the entire industry.

This paper is not intended to be overly prescriptive. Many of the issues we raise and the cases we present are meant to be launching points for further discussion. As the number of exits increases, we believe the topic of “what it means to exit responsibly” will warrant more examination – and we hope it will be explored further.

Danielle Piskadlo is a Manager in the Investing in Inclusive Finance program area at the Center for Financial Inclusion at Accion (CFI). 

Have you read?

The Art of the Responsible Exit in Microfinance Equity Sales

Microfinance Equity Investing: The Early Days of CMEF

Microfinance Equity Investing: Different Context, Similar Issues