2012 MF Equity Valuation Survey

2012 Global Microfinance Equity Valuation Survey

Volume Growth and Valuation Contraction

June 2012

The survey results in this presentation are published in:

Jasmina Glisovic, Henry Gonzalez, Yasemin Saltuk, and Frederic Rozeira de Mariz. 2012. Volume Growth and Valuation Contraction: Global Microfinance Equity Valuation Survey 2012. CGAP and J.P. Morgan.

For more information please visit: http://www.cgap.org/p/site/c/template.rc/1.9.57511/

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http://www.cgap.org/p/site/c/template.rc/1.9.57511/

Introduction

• Purpose: The microfinance equity valuation survey provides benchmarks for valuation of microfinance equity, both private and publicly listed, in order to promote market transparency and offer industry trends.

• Survey Cycle: This survey cycle covers microfinance equity transactions finalized in the period of January- December 2011.

• The following slides provide a summary of results from this years valuation.

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Outline

Section 1: Private Equity Valuation

• Methodology

• Overall Growth and Valuation Trends

• Type of Deals

• Transaction Size

• Regional and Country Specific trends

Section II: Publicly Listed Companies Valuation (LIFI Index)

• LIFI Definition and Methodology

• Country and Stock Breakdown

• Performance

• Valuation Summary

Section III: Conclusion

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SECTION IPRIVATE EQUITY VALUATION

METHODOLOGY

Methodology

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OVERALL GROWTH AND VALUATION TRENDS

• There were 68 transactions totaling $292 million in 2011- up from 37 transactions totaling $205 million in 2010.• This increase was largely driven by large transactions in LAC as well as DFI investments in India.• 29 investors including asset managers of MIVs and DFIs provided data (see Annex for full list).

The number of transactions almost doubled, volume increased by 43%

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Number & Volume of Transactions

43%

Source: CGAP Research, Global Microfinance Equity Survey 2012.

• P/E multiples have reversed since its 2010 peak, while P/B multiples decreased.• The key contributing drivers to the contraction in valuation multiples were continued uncertainties about asset quality seen in some markets since 2009 and the ongoing regulatory uncertainties in India..

Forward book value multiples contract to its lowest level since 2008

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Historical Valuation Breakdown

Historical P/E* Forward P/B

Year Average Median Average Median2005 9.1 7.9 1.1 0.9

2006 8.5 7.3 1.0 0.9

2007 10.4 7.2 1.2 1.0

2008 10.3 8.1 1.4 1.1

2009 12.8 13.0 1.7 1.4

2010 20.1 23.4 1.6 1.4

2011 11.4 11.3 1.4 1.2*2011 calculations reflect data from 44 transactions where valuation information was provided for both Historical P/E and Forward P/BVSource: CGAP Research, Global Microfinance Equity Survey 2012.

• In 2011, the secondary markets represented 56% of total transaction volume in USD terms, a decrease from 69% in 2010. • LAC captured the most volume of secondary issuance.• Primary issuance on the other hand grew more than 13% (from 31% in 2010 to 44% in 2011).

Secondary issuances continued to dominate, but at a slower pace

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Volume of Transactions by Type of Deal


• Overall median transaction size was $1.5 million. • LAC has the largest median transaction size at $2.64 million and has been increasing since 2009. • SSA and Asia have continued to decrease since 2010.• ECA remained at the same level as in 2010.

LAC experienced the largest median transaction size

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Median Transaction Size


REGIONAL AND COUNTRY SPECIFIC TRENDS

• LAC had the largest share of capital flows with Peru contributing over 70% to the region.• Asia had the 2nd largest amount of PE investments, 92% of which was from India.• SSA experienced the highest growth in investments - more than tripling its share of PE investments, since 2009.

LAC accounts for more than half of the total amount of equity investments

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Regional Share of Microfinance Equity Investments (Volume $)


• The bulk of the investments in LAC were capital flows from established microfinance players growing into new international markets as majority shareholders.• Other countries with the most deal activity included India and Mongolia.• Together, India and Peru made up 70% of equity investments in 2011.

Peru experienced some of the largest number and volume of investments

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Key acquisitions in LAC

Date Target AcquirerTransaction Amount

2011 Jun

Financiera Crear (Peru)

Compartamos SAB de CV (Mexico) $63mn

2011 May

Fondo Esperanza (Chile)

Fundación Microfinanzas BBVA (Spain) $13mn

2011 Apr

Financiera Confianza (Peru)

Fundación Microfinanzas BBVA (Spain) $33mn

CountryTotal # Transactions

Transaction Amount

4-yr avg P/B(fwd)

2011 avg P/B(fwd)

Peru 10 $116.5mn 1.5 1.8

India 19 $88.4mn 2.0 1.9

Mongolia 7 $7.7mn 1.3 1.0

Countries with the most deal activity

Source: CGAP Research, Global Microfinance Equity Survey 2012.Source: MicroCapital Monitor.

• 19 India deals were closed and priced-totaling over US$88mn vs. 10 deals over US$45mn in 2010• 74% of India Investments in terms of volume came from DFIs.• Average and median multiples of price-to-book value dropped in 2011.• This was likely impacted by distressed portfolios of several MFIs (especially in Andhra Pradesh).

India dominates investments in Asia (92%), but lower valuations indicate continued impact of the crisis

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Majority of investments are made by DFIs India: Median Average Expected P/B


• SSA and LAC showed lower average valuations in 2011, Asia remained stable while ECA showed a slight increase compared to 2010.

ECA was the only region to experience an increase in average valuations

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Historical Valuation Breakdown by Region

Average Forward P/BV # of Deals

2005 2006 2007 2008 2009 2010 2011 2011

Africa 0.6 0.8 1.5 1.5 1.0 1.1 0.8 5

Asia 1.3 1.7 1.5 1.5 1.9 1.8 1.8 19

ECA 1.1 1.1 1.0 1.6 2.1 0.9 1.1 10

LAC 1.2 0.8 1.0 1.2 1.2 1.5 1.4 10


SECTION II

PUBLIC EQUITY LIFI INDEX

LIFI INDEX

• Definition: LIFIs are publicly traded commercial institutions that provide financial services to customers who overlap significantly with those of MFIs—the lower income population in emerging markets. LIFIs do not necessarily have an explicit social agenda, and their loan portfolios tend to feature more consumer loans than microenterprise loans.

• Methodology: The companies selected as LIFIs must meet the following conditions: offer financial services; serve the low income segment of the populations and are listed on an exchange, with daily liquidity of at least US$0.1 million

• Data Sample: The Index represents a sample of 11 publicly traded lower income finance institutions (LIFIs).

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• The LIFI Index is a market cap-weighted index of 11 companies from various geographies, and business models.

•The breakdown is different from the breakdown on the PE market.

Country breakdown: Indonesia makes up over 50% of the LIFI Index

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Stock breakdown of the LIFI IndexCountry breakdown of the LIFI Index

• The LIFI Index mostly outperformed global financial institutions and emerging market banks as measured by the MSCI World Financials Index and the MSCI EM Banks Index.

• This is also evidenced by the compound annual growth rate (CGAR) table above.

LIFIs outperformed global financial institutions and emerging market banks

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LIFI Index Outperformed Other Banks Indices since Inception (Nov-2003)

Annualized performance of indices over four time periods: LIFI outperforms

LIFI Index

MSCI World Financials

MSCI EM Banks

Since Launch (Nov-03)

26% -3% 13%

Since Pre crisis peak (Nov-07)

6% -14% -4%

Since Lehman (Sep-08)

20% -6% 7%

Since AP crisis (Oct-10)

-4% -2% -9%

Source: J.P. Morgan, Bloomberg, as of April 24, 2012. The index is set with a value of 100 in November 2003

Source: J.P. Morgan, Bloomberg prices as of April 24, 2012.

• The annual performance table above displays that LIFIs outperformed World Financials and EM banks for six of the nine years since 2004, all but 2005 and 2007.

LIFIs maintained performance over last 9 years

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Annualized performance of indices for each year (%)

2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD

LIFI Index 108% 10% 53% 14% -42% 93% 46% -13% 13%

MSCI World Financials 15% 9% 21% -11% -56% 28% 2% -21% 11%

MSCI EM Banks 39% 32% 32% 23% -53% 83% 17% -24% 10%

Source: J.P. Morgan, Bloomberg, prices as of April 24, 2012. We highlight the top performing index for each year. * year-to-date (YTD) performance..

• The top three performers since 1 July 2011 were Capitec (South Africa, +42 percent), Danamon (Indonesia, +19 percent), and Tabungan (Indonesia, +13 percent).

• The top three underperformers were SKS (India, -69 percent), Findep (Mexico, -51 percent), and Compartamos (Mexico, -33 percent).

South African and Indonesian stock markets in LIFI index outperformed global markets

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Performance of the underlying stocks in the LIFI Index (since July 2011)

Source: J.P. Morgan, Bloomberg data since July 1, 2011, as of April 24, 2012. ABL: African Bank; CPI: Capitec; COMPARC*: Compartamos; FINDEP*: Financiera Independencia; BBRI IJ: Bank Rakyat Indonesia; BDMN IJ: Danamon; BTPN IJ: Tabungan; IPF: International Personal Finance; FCFS: First Cash Financial; SKSM IN: SKS; EQBNK KN: Equity Bank.

• The LIFI Index currently trades at 13.5x 2011A earnings and 2.7x 2012E book value- representing a higher earnings and book multiples than traditional global banks.• The LIFI Index average expected return on equity (ROE) remained stable at 27 percent.• Book value valuations contracted from 4.2x in last year’s edition to 2.7x using most recent data.

The LIFI index has higher earnings and book multiples than traditional global banks

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Valuation summary: Comparing the LIFI index with traditional banks

Source: J.P. Morgan, Bloomberg estimates, prices as of April 24, 2012. ADTV = average daily trading volume for the past three months; EPS = earnings per share; ROE = return on equity.

CONCLUSION

Conclusion

• Overall the microfinance PE market grew, experiencing the largest flow of capital reported to date at $292 million ($382 million was actually reported $292 million represents eligible transactions).

• The key contributing factors to this growth included: several large transactions in LAC, expectations of an improved regulatory environment in India; and lower valuations in most regions except in ECA.

• There was a contraction in multiples for MFIs and LIFIs. The forward book value multiple dropped to an average of 1.4x book value from a high of 1.7x in 2009. This suggests continued impact of the crisis persists.

• We project 2012 valuations to remain stable in most markets except SSA and certain countries in LAC which could result in an increase in valuations.

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APPENDIX

Survey Participants, 29 MIVs and DFIs

• Aavishkaar Goodwell India Microfinance Development Company

• ACCION• Advans SA SICAR• BlueOrchard Investments• CAF Development Bank of Latin America• Caspian Advisors Private Limited• Compartamos SAB de CV• Creation Investments Capital Management,

LLC• Developing World Markets (DWM)• Développement International Desjardins

(DID) • Elevar Equity, LLC• European Bank for Reconstruction and

Development (EBRD)• FINCA• FMO, Netherlands Development Finance

Company

• Fundación Microfinanzas BBVA

• Incofin Investment Management

• MicroCred

• MicroVentures Investment SICAR

• MicroVest Capital Management, LLC

• Norwegian Investment Fund for Developing Countries (Norfund)

• Norwegian Microfinance Initiative AS (NMI)

• Omidyar-Tufts Microfinance Fund

• OXUS Group

• PROPARCO

• Prospero Microfinanzas GP

• responsAbility Social Investments AG

• Solidarité Internationale pour le Développement et l’Investissement (SIDI)

• Triodos

• Triple Jump B.V

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Economy & Finance

2012 MF Equity Valuation Survey