The total demand for microfinance in Asia is about 1 billion borrowers, but only 74 million borrowers are being served, creating investment opportunity for private equity, according to Jean-Philippe de Schrevel, chief executive of Switzerland-based Bamboo Finance, a private equity firm focused on the microfinance sector.
Worldwide, private equity investment in the sector increased 14 percent to $6 billion in 2012, compared to $5.3 billion in 2011, according to figures from Bamboo.
The vast majority of that growth is coming from Asia, particularly India, according to the firm.
“The idea behind microfinance is the financial inclusion of the unbankable,” de Schrevel told Private Equity International.
Dedicated microfinance funds are still new in Asia. According to PEI’s Research & Analytics division, 51 finance-related funds, for which microfinance is sometimes a target, have closed over the past five years in Asia, raising a cumulative total of $32 billion. However, none of these funds are solely focused on the sector.
Bamboo is the exception. Last year it launched an Asia-specific microfinance fund that is targeting $100 million.
Although the sector is relatively new in the region, returns on such investments are “in line with mature sectors”, according to Xavier Pierluca, Bamboo’s chief investment officer. For example, Bamboo has already had one exit in Mongolia, which gave the firm a 20 percent IRR, he said.
Microfinance can be challenging, Pierluca added. Regulation for the sector is not consistent, even within countries, and some politicians have tried to use microfinance legislation to influence the masses of poor voters that it impacts.
Nonetheless, the number of borrowers in Asia has doubled in the last five years, with India showing particularly fast growth, according to Bamboo’s research. With about 200 microfinance institutions in India alone, the sector is in constant need of capital to refinance itself.
At the same time, some Asian LPs are concerned that microfinance may be too much of a niche to be the focus of an entire private equity fund. One Asia-based LP said that investing in microfinance on an individual project and co-investment basis could be attractive. But a fund manager would be lucky to find one or two quality microfinance institutions to invest in.
Wen Tan, partner at FLAG Capital Asia, added: “Investors will first want to get comfortable that there is enough dealflow in the microfinance sector to justify a microfinance-focused sector fund.”
Although FLAG does have a microfinance portfolio investment that is showing strong performance, he also believes Asia doesn’t have many high-quality institutions in the sector.
“The logical first step may well be a regional fund: if you can look at, say, India, Southeast Asia and elsewhere [at the same time], that’s where you’ll get a greater depth of dealflow than in a single market alone,” Tan added.