PEI: How do you manage being social impact investors and generating returns for your LPs?
We are doing what we do because we want to make an impact in the world and help poor people live better – that is the prime motivation. The way of doing that is commercial investment and private equity and we see no contradiction between getting a 20 percent IRR to our LPs and doing something really good. We believe that if you are only looking after impact and that’s what your prime motivation is, it is even better to do it commercially because then you have an approach that is sustainable, fast-growing, scalable and exponential. So your impact is much higher than if you were to just do philanthropy.
PEI: Why choose to invest mainly in microfinance businesses?
When our LPs look at us and ask how we are going to sell a minority stake in a microfinance bank, we say we see an increasing interest from commercial banks in those regions to actually buy microfinance companies because it is too difficult for them to do it in house. It is a nice way of actually keeping the third-party brand dealing with a specific segment and then cross-selling products.
There are 2 billion people worldwide with no access to financial services so there is still a serious gap to bridge. We see it as a dynamic industry, not only in Asia but Latin America as well, where the sector is quite mature. So banks like BBVA out of Spain is acquiring several of these [Latin American] organisations and we see Peruvian banks acquiring organisations locally.
How do you add value to these investments?
We don’t use consultants. Typically the microfinance companies we invest in will have [up to] four years’ of operating experience and then the value-add is actually quite simple, such as helping them manage their finances and making sure the governance structure is in place. That is immediate value that we’re bringing. We’re not investing in established 20-year old businesses that are totally sophisticated.
In other invested companies, the thing to critically factor in is not so much the product, but distribution – how do you get this service or product to the customer. For example, selling one million solar lamps in Africa in rural areas. It is easy to think about it but it’s different doing it and you have different strategies to do it. You can go with a specialised sales force [or] a franchising business, you name it. The more we are doing it across sectors, the more we have insight into what works.
We really want to be hands-on. We are local investors and we are by a pre-requisite on the board and we maintain a ratio of investments per investment manager of maximum 2:3, meaning each investment manager will spend a considerable amount of time sitting on those boards, talking to those companies and guiding management. That’s what our LPs like.
How has your first [$195m] microfinance fund performed?
After our [third and most recent] exit from Xac Bank in Mongolia, we will have returned 25 percent of our capital to LPs after five years.
We exited TFGS Bank in 2011, with an IRR north of 20 percent and we exited a portfolio company in Peru, Nueva Vision, to another strategic investor with interests in different sectors – specifically in supermarkets in the south of the country where our investment was operating. They were interested in adding a financial services component to their offering. There, we achieved an IRR north of 25 percent and a 2x cash multiple.