Legatum, the Dubai-based investment firm, has made two investments in India’s microfinance industry in the largest such deals in a sector that was once the sole province of non-governmental organisations and charities.
Legatum, formerly part of investment house Sovereign Global, has bought a majority stake in Share Microfin, India’s largest microfinance institution, and invested in Financial Information Network & Operations (Fino), which provides technology to the sector.
Legatum is considering taking Share Microfin public within five years in what could be a first for a fast-growing industry that analysts estimate is generating more than $1bn in new loans in India a year.
The deals come as mainstream commercial and investment banks are beginning to take interest in the high returns offered by the microfinance industry.
Morgan Stanley this month announced it was seeking to raise $108m through the sale of collateralised loan obligations from unsecured loans to small banks and microfinance organisations in 13 developing countries. US venture capital firm Sequoia Capital said it had invested $11.5m in India’s SKS Microfinance.
The industry’s higher profile follows the award of the Nobel peace prize to Muhammad Yunus, founder of Bangladesh’s Grameen Bank.
Under its Indian deals, Legatum will pay $25m for a majority stake in Share and $4.5m for an undisclosed interest in Fino.
“We’re seeing the emergence of well-run microfinance companies that have a for-profit model that can be scaled up,” said Mark Stoleson, president of Legatum. “We believe that’s the best approach to delivering financial services to India’s 600m unbanked masses.”
Mr Stoleson said Legatum hoped to grow Share’s loan portfolio sixfold in five years to $600m and its number of customers from 1m to 6m over the same period.
Udaia Kumar, the founder of Share, said the company specialised in the bottom rung of income earners, with most of its customers well below the poverty line.
The average loan size is Rs4,500-Rs5,000 ($111-$123), with interest typically set at 20-24 per cent per year. Non-performing loans make up about 3 per cent of the total outstanding.
He said the equity provided by Legatum would enable Share to expand rapidly, with plans to increase its branches from 312 offices in five states to 1,720 in 12.
India’s commercial banks are also increasingly targeting the sector. But Mr Kumar said this would not hurt Share’s competitive position as the company was servicing a lower income bracket than the larger private institutions.
Mr Stoleson declined to provide details of Share’s financial performance or Legatum’s expected investment returns.
“This is an investment that has a financial rationale to it,” he said. “It’s critical that there is a compelling financial return here.”
He expected the deal to stimulate further private investment in the sector.
Fino provides smart card systems and back-office technology for microfinance institutions.
Legatum, which says it has invested $1bn in India, was formed as part of a demerger last year of Sovereign. Under its former name, the fund was best-known in Asia for a corporate governance battle with SK Corp, the South Korean oil trader.