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Volume Growth and Valuation Contraction: Global Microfinance Equity Valuation Survey 2012owth

Volume Growth and Valuation Contraction: Global Microfinance Equity Valuation Survey 2012owth

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Published by CGAP Publications
Toward the end of 2010, the asset quality of many microfinance institutions began to recover from a crisis of client over-indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua. During 2011 and into 2012, this recovery continued to bring higher microfinance equity transaction volumes. Based on the responses gathered in this year's survey, the private equity markets experienced an important increase in deal activity from the slower pace recorded in 2010. Large transactions in Latin America and the Caribbean as well as strong flows from development finance institutions in India drove the increase in both the volume and the number of transactions.

While asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the multiple expansion that had taken place up until then. This is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny, which was most pronounced in a few countries making up a significant portion of our sample (and the market), such as India. In 2011, our comparables in the public market also declined with a drop in the average valuation of the Lower Income Finance Institutions Index. We believe this reflects a wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of tradition financial institutions in emerging markets.
Toward the end of 2010, the asset quality of many microfinance institutions began to recover from a crisis of client over-indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua. During 2011 and into 2012, this recovery continued to bring higher microfinance equity transaction volumes. Based on the responses gathered in this year's survey, the private equity markets experienced an important increase in deal activity from the slower pace recorded in 2010. Large transactions in Latin America and the Caribbean as well as strong flows from development finance institutions in India drove the increase in both the volume and the number of transactions.

While asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the multiple expansion that had taken place up until then. This is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny, which was most pronounced in a few countries making up a significant portion of our sample (and the market), such as India. In 2011, our comparables in the public market also declined with a drop in the average valuation of the Lower Income Finance Institutions Index. We believe this reflects a wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of tradition financial institutions in emerging markets.

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Published by: CGAP Publications on Mar 14, 2013
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Ve Gwth nd Vtin Cntctin
Global Microfnance Equity Valuation Survey 2012
Jasmina Glisovic, Henry González, Yasemin Saltuk, and Frederic Rozeira de Mariz
Access to Finance
Forum
Reports by CGAP and Its Partners 
No. 3, My 2012
 
The authors o this paper are Jasmina Glisovic and Henry González (or CGAP) and Yasemin Saltukand Frederic Rozeira de Mariz (or J.P. Morgan). Deborah Drake (Council o Micronance EquityFunds— CMEF) provided invaluable guidance throughout the research. The authors also would liketo acknowledge the contributions o Greg Chen and Mayada El-Zoghbi rom CGAP, Danielle Donzarom CMEF, Aditya Srinath, Head o Indonesia Research at J.P. Morgan, Mervin Naidoo, Head o South Arica Financials Research at J.P. Morgan, and Sunil Garg, Head o Equity Research or Asia-Pacic at J.P. Morgan. Senayit Mesn, CGAP consultant, provided excellent research assistance.We thank the investors and MFIs who contributed to CGAP’s condential equity valuation survey(see the appendix or the ull list o contributing institutions).
The authors remain responsible for the opinions expressed in this report and for any inaccuracies.
This report is the result o a collaborative eort between CGAP and J.P. Morgan. J.P. Morgan analystsare solely responsible or the investment opinions and recommendations, i any, in this report.See page 17 or important disclosures.
© 2012 Consultative Group to Assist the Poor/The World BankAll rights reserved.Consultative Group to Assist the Poor1818 H Street, N.W.Washington, DC 20433 USAInternet: www.cgap.orgEmail: cgap@worldbank.orgTelephone: +1 202 473 9594
E
quity capital fows into micronance have been increasing or many years, with both retailand institutional investors showing interest in this sector o nancial services. Despitethis growth, the vast majority o equity investments are still made in the orm o privateplacements, as there are only three publicly traded micronance institutions (Equity Bank inKenya, Compartamos in Mexico, and SKS in India). The diculty in accessing private dataand the scarcity o publicly listed entities have limited the scope o the market researchavailable to equity investors in micronance institutions.To address this research gap, CGAP and J.P. Morgan joined eorts in 2009 to publishan annual Global Micronance Equity Valuation Survey Report. This partnership benetsrom the deep micronance market knowledge o CGAP and the emerging markets equityresearch skills o J.P. Morgan. In the past two years, it has also beneted rom the supportand industry experience o the Council o Micronance Equity Funds (CMEF). The aim o these yearly publications is to provide benchmarks or the valuation o micronanceequity, both private and publicly listed, to promote market transparency and identiyindustry trends.This year’s report is the ourth edition o this research partnership. Previous editions o the report are available on the J.P. Morgan and CGAP Web sites.
 
1
T
oward the end o 2010, the asset quality o many micronanceinstitutions (MFIs) began to recover rom a crisis o client over-indebtedness and unsustainable growth, particularly in India,Bosnia, and Nicaragua.
1
During 2011 and into 2012, this recovery con-tinued to bring higher micronance equity transaction volumes.
2
Basedon the responses gathered in this year’s survey, the private equity (PE)markets experienced an important increase in deal activity rom theslower pace recorded in 2010. Large transactions in Latin America andthe Caribbean (LAC) as well as strong ows rom development nanceinstitutions (DFIs) in India drove the increase in both the volume andthe number o transactions.While asset quality improved and transaction volumes increased,equity valuations continued to decline in 2011 rom their peak in 2010,reversing the multiple expansion that had taken place up until then.This is likely due to lingering uncertainties about asset quality in somemarkets and continued public scrutiny, which was most pronounced ina ew countries making up a signicant portion o our sample (and themarket), such as India. In 2011, our comparables in the public marketalso declined with a drop in the average valuation o the Lower IncomeFinance Institutions (LIFIs) Index.
3
We believe this reects a widertrend where LIFI and micronance valuations in the public and pri-vate markets are beginning to converge toward those o traditional -nancial institutions in emerging markets.Section 1 o this report examines the landscape o PE deals. It ol-lows the methodology o previous surveys and discusses valuationtrends and new market developments (see Box 1 or more details onthis methodology). This section also delves into deeper regional analy-sis and key country developments. We estimate that our sample covers70–80 percent o the micronance PE activity in 2011.Section 2 looks at the valuation trends in the public market or LIFIsin developing countries. This analysis includes banks that are not ex-clusively oering micronance but are also oering consumer loansand other nancial services. Since LIFIs serve similar markets to mi-cronance, their valuation can be a useul comparable or MFIs. Thisreport looks at the same 11 constituents o the LIFI Index that werereviewed in the 2011 edition.
Intdctin
1. As evidenced by the percentage o loan portolios where the loans are 30 days in ar-rears (known as portolio-at-risk or PAR 30) or the average o 50 MFIs with signi-cant oreign capital investments (as measured by Symbiotics SYM 50 index).2. For example, the average PAR 30 dropped rom a high o 5.5% in early 2010 to its cur-rent level at 3.5%, as measured by Symbiotics SYM 50 index.3. As measured by the Price/Book Value ratio in this report and the previous editions.

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