Responsible Equity Exits: Lessons From Cambodia

FinDev Gateway, 13 March 2024

Back in 2019, the music mega-star Taylor Swift learned that the master recordings of her first six albums had been sold for $300m to an investor whom Swift regarded as an “incessant, manipulative bully” that put his own interests ahead of the artist whose work he now owned. This was a classic case of an irresponsible exit. The seller – Swift’s old manager, who had played an important part in building up her stardom during the first decade of her career – chose to maximize returns, paying no heed to whether the buyer was a reasonable fit.

Now, imagine a similar scenario in the financial inclusion sector:

Consider an NGO that spent decades incubating a strong social mission in a financial institution serving poor clients, ending its involvement by selling all of its shares to an investor focused entirely on maximizing profits. Following the purchase, the buyer steers the institution away from its poorest clients, refocusing entirely on profits and dispensing with the niceties of impact measurement or even basic client protection.

That’s an extract from the recent joint publication by CERISE+SPTF and e-MFP which I co-authored, Rethinking Responsible Equity Exits. And it happens to be particularly appropriate to Cambodia.

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Liquidity Before Solvency: A Guide for Microfinance Investors in the Time of COVID-19

next billion, 14 April 2020

The COVID-19 pandemic has generated a real sense of crisis in inclusive finance, surpassing even the reaction to the 2008 financial crash a decade ago. And particularly among investors, the topic of highest concern is the looming crisis in liquidity for financial institutions.

For microfinance institutions (MFIs) in many countries, the combined effects of the pandemic and its economic impact will lead to high levels of non-performing loans (NPLs), as clients struggle to make their scheduled payments. During past crises, the typical impact on MFIs has been a period of retrenchment. Much of this is likely to be repeated: With slowing trade and economic activity, fewer loans will be made and portfolios will shrink. The combined effect of credit losses from the NPLs and a shrinking portfolio will put serious pressure on equity capital, quite possibly threatening MFIs with outright insolvency, and ultimately, losses to investors.

But a financial institution can simultaneously be insolvent and still liquid, and in a crisis, preserving MFIs’ liquidity must take precedence over maintaining their solvency. To understand why, it’s important to explore the two concepts, and how they’re likely to impact MFIs and their investors as the current crisis progresses.

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Caveat Venditor: A New Model for Buyer Selection in Responsible Microfinance Equity Exits

next billion, 2 May 2018 (with Sam Mendelson)

For most, socially responsible investing means just that – investing in a manner that not only generates financial returns but also produces positive social value. But what does it mean for an investor to be “responsible” when selling their holdings? How does one stay responsible at the very moment when one ceases to be an investor?

This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their 10-year terms and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a 2014 papercommissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes.

With another four years of multiple exits under the sector’s belt, NpM, Netherlands Platform for Inclusive Finance, along with the Financial Inclusion Equity Council (FIEC) and the European Microfinance Platform (e-MFP) asked us to take a closer look at one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits – a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” More –>

A Giant Stumbles: Why did investors abandon Blue Orchard?

Microfinance Focus, 10 December 2012; microDinero (Spanish), 12 December 2012

Over the past 18 months, one of the microfinance sector’s largest and most prominent funds, Blue Orchard’s Dexia Micro-Credit Fund (recently renamed Blue Orchard Microfinance Fund), saw a major outflow of investor capital, with some $268 million or nearly 50% of the fund’s peak value having been redeemed.  The scale of these outflows is unprecedented in the sector.  For years, investment capital largely flowed one way:  in.  The exit doors were there, but rarely used.  That is no longer the case.  The pioneer of the microfinance investment industry has now crossed another milestone in the industry’s development.

Like Dexia, many microfinance funds (commonly referred to as Microfinance Investment Vehicles or MIVs) are subject to unscheduled redemptions.  For those funds, their investors, as well as others in the sector, BlueOrchard’s experience holds important lessons, and it is those lessons that this article hopes to convey. more →

From Responsible Lending to Responsible Profit

Financial Access Initiative, 16 November 2012

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.

With few exceptions, his critique that microfinance investors are investing in MFIs charging exorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don’t belong in your portfolio or you should learn how to explain those investments.

Rates in excess of 100% (in APR terms) are not unknown in microfinance.  more →

Rethinking Multiple Borrowing

Financial Access Initiative, 14 September 2011; MicrofinanceFocus, 15 September 2011

Some time ago, I had a conversation with a microfinance investor.  What is the greatest challenge facing the sector? – I asked.  His answer:  multiple borrowing – multiple borrowing getting people into too much debt; multiple borrowing transforming micro-enterprise lending into consumer finance; multiple borrowing rewriting the traditional relationship between MFIs and their clients.

Of course, multiple borrowing is present in all of these cases.  But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance.  And despite press articles to the contrary, it is neither a result of heavy market penetration, nor even saturation. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. more →