Volume Growth and Valuation Contraction, Global Microfinance Equity Valuation Survey 2012

Abstract

Toward the end of 2010, the asset quality of many microfinance institutions (MFIs) began to recover from a crisis of client over indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua.1 During 2011 and into 2012, this recovery continued to bring higher microfinance equity transaction volumes.2 Based on the responses gathered in this year’s survey, the private equity (PE) markets experienced an important increase in deal activity from the slower pace recorded in 2010. Large transactions in Latin America and the Caribbean (LAC) as well as strong flows from development finance institutions (DFIs) 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 expansions 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 (LIFIs) 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 traditional financial institutions in emerging markets. Section 1 of this report examines the landscape of PE deals. It follows the methodology of previous surveys and discusses valuation trends and new market developments (see Box 1 for more details on this methodology). This section also delves into deeper regional analysis and key country developments. We estimate that our sample covers 70–80 percent of the microfinance PE activity in 2011. Section 2 looks at the valuation trends in the public market for LIFIs in developing countries. This analysis includes banks that are not exclusively offering microfinance but are also offering consumer loans and other financial services. Since LIFIs serve similar markets to microfinance, their valuation can be a useful comparable for MFIs. This report looks at the same 11 constituents of the LIFI Index that were reviewed in the 2011 edition.