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Drew tulchin
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Drew tulchin

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  • I.                      Understanding our audience (3 min) a.       Who is our audience? Currently donors                                                    i.       We’ve gotten good at appealing to them                                                  ii.       What happens when they go away?                                                 iii.       Preponderant model – 5 years as NGO to sustainability, then transform over 2 years to bank b.       Who is the audience of capital markets? – Investors                                                    i.       Individuals                                                  ii.       Institutions                                                 iii.       SRI                                                iv.       ‘The Street’ c.       What are investors used to?                                                    i.       Investment is known, familiar, understood                                                  ii.       Risk factors are measured or known                                                 iii.       Comparable                                                iv.       Track record / history ‘ Fits’ in their portfolio
  • I.                      Understanding our audience (3 min) a.       Who is our audience? Currently donors                                                    i.       We’ve gotten good at appealing to them                                                  ii.       What happens when they go away?                                                 iii.       Preponderant model – 5 years as NGO to sustainability, then transform over 2 years to bank b.       Who is the audience of capital markets? – Investors                                                    i.       Individuals                                                  ii.       Institutions                                                 iii.       SRI                                                iv.       ‘The Street’ c.       What are investors used to?                                                    i.       Investment is known, familiar, understood                                                  ii.       Risk factors are measured or known                                                 iii.       Comparable                                                iv.       Track record / history ‘ Fits’ in their portfolio
  • I.                      Understanding our audience (3 min) a.       Who is our audience? Currently donors                                                    i.       We’ve gotten good at appealing to them                                                  ii.       What happens when they go away?                                                 iii.       Preponderant model – 5 years as NGO to sustainability, then transform over 2 years to bank b.       Who is the audience of capital markets? – Investors                                                    i.       Individuals                                                  ii.       Institutions                                                 iii.       SRI                                                iv.       ‘The Street’ c.       What are investors used to?                                                    i.       Investment is known, familiar, understood                                                  ii.       Risk factors are measured or known                                                 iii.       Comparable                                                iv.       Track record / history ‘ Fits’ in their portfolio
  • I.                      Talks like a Duck – Use of language in the microfinance industry (5 min) a.       Language as a communication tool (Foucault, Chomsky, or other quoted) b.       Language is an indicator of behavior c.       Investors need us to talk in their language or at least a language they are comfortable with and understand d.       Problems                                                    i.       Sustainability, not profitability                                                  ii.       Clients, not customers                                                 iii.       Outreach, not marketing e.       Solution Begin to adapt an investor-oriented language. This is a relatively small and subtle point, but highly indicative of larger issues. Certainly can be done once transformation is underway, but better addressed from the onset. Some might say a minor point, therefore all the easier to implement Can be changed once a bank, but easier to address from onset of organization Indicative of larger issues, see next section
  • I.                      Talks like a Duck – Use of language in the microfinance industry (5 min) a.       Language as a communication tool (Foucault, Chomsky, or other quoted) b.       Language is an indicator of behavior c.       Investors need us to talk in their language or at least a language they are comfortable with and understand d.       Problems                                                    i.       Sustainability, not profitability                                                  ii.       Clients, not customers                                                 iii.       Outreach, not marketing e.       Solution Begin to adapt an investor-oriented language. This is a relatively small and subtle point, but highly indicative of larger issues. Certainly can be done once transformation is underway, but better addressed from the onset.
  • I.                      Walks Like a Duck – MFIs need to resemble institutions for whom private capital is raised (5 min) a.       The novelty of the MFI story helping the poor person. That is not enough. It is a testimonial. At best, it is niche marketing. At extreme, it is a further example of how MFIs are relegated to donations and not ready for private investment. b.       The Problem                                                    i.       A stereotypical NGO, looks like an NGO from the outside                                                  ii.       There is no accountability, poor reporting, few systems                                                 iii.       It is an NGO. It has a weak board filled with the founder/leader, some friends, and some big names to attract attention. No one owns it or has fiduciary responsibility for financial transactions.                                                iv.       No one owns the assets, nor is there strong rights to them                                                  v.       The organization has not made a realistic assessment of its operational risks nor done a comparative analysis of the marketplace. c.       The solution                                                    i.       Professional presentation                                                  ii.       House in order – Reporting & Management systems in place                                                 iii.       Governance                                                iv.       Ownership                                                  v.       Risk assessment Yes, there are exceptions. Public housing financing, NGOs are financed, Public/private entities LISC.
  • I.                      Walks Like a Duck – MFIs need to resemble institutions for whom private capital is raised (5 min) a.       The novelty of the MFI story helping the poor person. That is not enough. It is a testimonial. At best, it is niche marketing. At extreme, it is a further example of how MFIs are relegated to donations and not ready for private investment. b.       The Problem                                                    i.       A stereotypical NGO, looks like an NGO from the outside                                                  ii.       There is no accountability, poor reporting, few systems                                                 iii.       It is an NGO. It has a weak board filled with the founder/leader, some friends, and some big names to attract attention. No one owns it or has fiduciary responsibility for financial transactions.                                                iv.       No one owns the assets, nor is there strong rights to them                                                  v.       The organization has not made a realistic assessment of its operational risks nor done a comparative analysis of the marketplace. c.       The solution                                                    i.       Professional presentation                                                  ii.       House in order – Reporting & Management systems in place                                                 iii.       Governance                                                iv.       Ownership                                                  v.       Risk assessment Yes, there are exceptions. Public housing financing, NGOs are financed, Public/private entities LISC.
  • I.                      Walks Like a Duck – MFIs need to resemble institutions for whom private capital is raised (5 min) a.       The novelty of the MFI story helping the poor person. That is not enough. It is a testimonial. At best, it is niche marketing. At extreme, it is a further example of how MFIs are relegated to donations and not ready for private investment. b.       The Problem                                                    i.       A stereotypical NGO, looks like an NGO from the outside                                                  ii.       There is no accountability, poor reporting, few systems                                                 iii.       It is an NGO. It has a weak board filled with the founder/leader, some friends, and some big names to attract attention. No one owns it or has fiduciary responsibility for financial transactions.                                                iv.       No one owns the assets, nor is there strong rights to them                                                  v.       The organization has not made a realistic assessment of its operational risks nor done a comparative analysis of the marketplace. c.       The solution                                                    i.       Professional presentation                                                  ii.       House in order – Reporting & Management systems in place                                                 iii.       Governance                                                iv.       Ownership                                                  v.       Risk assessment Yes, there are exceptions. Public housing financing, NGOs are financed, Public/private entities LISC.
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • I.                      Looks Like a Duck – What a deal has to look like (5 min) a.       Understand the audience b.       Different deals to different customers c.       The problem                                                    i.       Balance sheets                                                  ii.       Time needed for profitability                                                 iii.       Relatively small size                                                iv.       Int’l risk, country, and currency risk                                                  v.       Sending mixed messages (reference above) d.       The solution                                                    i.       Organization’s performance and ‘best practices’                                                  ii.       Regulations, nationally and internationally (e.g. New Zealand housing market)                                                 iii.       Donor’s ‘right’ assistance – guarantees, TA support, fixed start-up equity                                                iv.       Deal: term, return, size, underwriting criteria, monitoring, etc
  • Transcript

    • 1. Incorporating Microfinance Institutions into Capital Markets Drew Tulchin Social Enterprise Associates BYU, 6 th Conference on Microenterprise March, 2003 If it talks like a duck, walks like a duck & looks like a duck, it is more readily treated like a duck
    • 2. Incorporating Microfinance Institutions into Capital Markets <ul><li>Introduction </li></ul><ul><li>Understanding the Duck </li></ul><ul><li>Talking like a Duck </li></ul><ul><li>Walking like a Duck </li></ul><ul><li>Looking like a Duck </li></ul><ul><li>Duck Examples - Microfinance & the Capital Markets </li></ul><ul><li>Q & A </li></ul>
    • 3. Introduction <ul><li>Drew Tulchin </li></ul><ul><li>Social Enterprise Associates </li></ul><ul><li>A network of professionals making communities better by applying business skills & sustainable practices. </li></ul><ul><li>Who are you? What brought you here today? </li></ul>Who am I?
    • 4. Definitions & Assumptions <ul><li>Terminology </li></ul><ul><ul><li>MFI = Microfinance Institution </li></ul></ul><ul><ul><li>Define Microfinance, Micro-credit, Micro-debt, etc. </li></ul></ul><ul><li>Microfinance in Development </li></ul><ul><ul><li>Microfinance is NOT a universal development panacea </li></ul></ul><ul><ul><li>MFIs have proven the model & shown profitability </li></ul></ul><ul><ul><li>The promise of microfinance as a sustainable effective development tool is still unrealized </li></ul></ul><ul><li>Microfinance Moving Forward </li></ul><ul><ul><li>The industry’s next decade will be one of extensive change – ‘failures’ & consolidations </li></ul></ul><ul><ul><li>Profit is NOT a dirty word </li></ul></ul>
    • 5. Incorporating Microfinance Institutions into Capital Markets <ul><li>If it talks like a duck, walks like a duck & looks like a duck, </li></ul><ul><li>then it can be more readily treated like a </li></ul><ul><li>duck with regards to accessing capital markets. </li></ul>
    • 6. PICTURE Est. MFI Portfolio Annual Asset Turnover $4 B Est. Total Customer Need / Demand $300 B Where is this money going to come from?
    • 7. <ul><li>Understanding the Duck </li></ul>
    • 8. Understanding the Duck <ul><li>99% of MFIs are funded by donors </li></ul><ul><li>DONORS give money </li></ul><ul><ul><li> MFIs experienced (& good at) pitching them </li></ul></ul><ul><li>Current model: 5 years as NGO w/ donations, </li></ul><ul><li>2 years to transform into commercial bank </li></ul><ul><li>What happens when donors go away? </li></ul>Where does $$$ come from for MFIs?
    • 9. Understanding the Duck <ul><li>INVESTORS make investments </li></ul><ul><ul><li> MFIs less experienced (& good at) pitching them </li></ul></ul><ul><li>Investors vary: individuals, socially responsible investors (‘SRI’), institutions (‘The Street’) </li></ul><ul><li>What happens when MFIs don’t perform? </li></ul>Where does $$$ come from for Capital Markets?
    • 10. Understanding the Duck <ul><li>INVESTMENTS produce return </li></ul><ul><ul><li> MFIs face results oversight, potential mission drift </li></ul></ul><ul><li>Investments are easiest when: </li></ul><ul><ul><li>Industry is known; vehicle is understood </li></ul></ul><ul><ul><li>Viable exit strategy </li></ul></ul><ul><ul><li>Risk factors are known, identified & measured </li></ul></ul><ul><ul><li>Comparable to other investments </li></ul></ul><ul><ul><li>Have a track record / history </li></ul></ul><ul><li>What happens when MFIs cannot compete? </li></ul>What do investors expect from capital markets?
    • 11. PICTURE ANNUAL giving of all US Foundations (2000) $5 B DAILY transactions on Wall Street (2000) $1 T Which pot of money would you rather be drawing from?
    • 12. <ul><li>Talking like a Duck </li></ul>
    • 13. Talking Like a Duck <ul><li>Language </li></ul><ul><ul><li>Is a communication tool </li></ul></ul><ul><ul><li>Is an indicator of behavior </li></ul></ul><ul><li>MFIs & Investors </li></ul><ul><ul><li>Do not speak the same language </li></ul></ul><ul><ul><li>Do not use the same vocabulary </li></ul></ul>Investors expect to hear their language & their vocabulary
    • 14. Talking Like a Duck Language of returns w/ a financial motive Language for donors w/ a social motive Marketing Outreach Profitability Sustainability Customers Clients Investor Language MFI Language
    • 15. PICTURE Number of ‘ Counted’ MFIs 1% % financially self-sufficient, (a.k.a. profitable) 10,000 Which group would you prefer to belong to?
    • 16. <ul><li>Walking like a Duck </li></ul>
    • 17. Walking Like a Duck <ul><li>MFI Characteristics When Seeking Investment </li></ul><ul><li>Non-Profit Organization (NGO) </li></ul><ul><li>Mission driven </li></ul><ul><ul><li>promote need for service to help impoverished people </li></ul></ul><ul><li>‘ Informal’ </li></ul><ul><li>Metrics of success </li></ul><ul><ul><li># of loans made jobs created </li></ul></ul><ul><ul><li># people helped loan size </li></ul></ul>
    • 18. Walking Like a Duck <ul><li>Investment Barriers for MFI Characteristics </li></ul><ul><li>Are NGOs known for professionalism, as investment option? </li></ul><ul><ul><li>(There are exceptions: public housing, CDFIs, LISC, etc.) </li></ul></ul><ul><li>Is there accountability, reporting, strong systems? </li></ul><ul><li>Who ‘owns’ the entity? The Board of Directors? </li></ul><ul><li>Given the social mission, is management prudent, financial management practiced & are risks assessed? </li></ul><ul><li>Do investors understand & care about the metrics? </li></ul>
    • 19. Walking Like a Duck <ul><li>Investment Advances for MFIs Characteristics </li></ul><ul><li>Professional presentation </li></ul><ul><li>Ensure the house is in order </li></ul><ul><ul><li>timely reporting; management systems in place </li></ul></ul><ul><li>Be realistic, cautious in management & growth </li></ul><ul><li>Address governance – establish a commercial entity </li></ul><ul><li>Have ownership represented by Board of Directors </li></ul><ul><li>Promote ‘double bottom line’ – economic & social return </li></ul>
    • 20. PICTURE Growth Which side of the line returns an investment? Amazon.com ( the early years ) Gas Companies (Cash Cow) Profitability
    • 21. <ul><li>Looking like a Duck </li></ul>
    • 22. Looking Like a Duck <ul><li>MFIs Need to be Savvy & Business-like </li></ul><ul><li>Understand the investor ‘customer’ </li></ul><ul><li>Develop investment ‘products’ customers want </li></ul><ul><li>Differentiate customers </li></ul><ul><ul><li>They are NOT all the same </li></ul></ul><ul><li>Tailor products to increase sales </li></ul><ul><ul><li>– e.g. Mercedes Benz, but also Ben & Jerry’s </li></ul></ul>
    • 23. Looking Like a Duck Seek Equity, Quasi-Equity, Retain Earnings Balance Sheet Debt/Equity Ratio Secure Guarantees, Partner w/ ‘North’ Extensive Risks: i.e. Country & Currency Merge w/ Other Programs Relatively Small Size Reduce Growth (a la picture) Not Profitable Potential Solution MFI Challenge
    • 24. PICTURE How much return are investors seeking? (Source: Morino Institute) Donation Investment $ Return? NO $ Return? YES
    • 25. <ul><li>Duck Examples - Microfinance & the Capital Markets </li></ul>
    • 26. Duck Examples – MFIs in the Capital Markets <ul><li>Prisma Microfinance </li></ul><ul><li>US for-profit international MFI </li></ul><ul><li>Wholly owned subsidiaries by country </li></ul><ul><li>Raised $1.25 mil venture capital to date, </li></ul><ul><ul><li>In same manner as any US high growth start-up </li></ul></ul>
    • 27. Duck Examples – MFIs in the Capital Markets <ul><li>Trinidad & Tobago MFI </li></ul><ul><li>Affiliated with development bank </li></ul><ul><ul><li>Offering received ‘BB’ Rating from private company </li></ul></ul><ul><li>Bond Offering: $2.8 mil </li></ul><ul><ul><li>Well structured - Coupon paid quarterly, 10 year (w/ renewal), Liquid (w/ put option) </li></ul></ul><ul><ul><li>Customers given board placement - dev bank, private investors (insurance companies), IADB (MIF) </li></ul></ul>
    • 28. Duck Examples – MFIs in the Capital Markets <ul><li>Investment Models Avail. to Individuals </li></ul><ul><li>Calvert Social Investment Fund (US SR Mutual Fund) & Wisconsin Coordinating Council on Nicaragua (WCCN) </li></ul><ul><li>Investors: ‘choose’ returns, onlends @ neg rate 10%, med term. </li></ul><ul><li>Size = $50 mil, $3 mil </li></ul><ul><li>Oikocredit (Dutch based religious org) </li></ul><ul><li>Investors: negligible return, onlends @ market rates, short term. </li></ul><ul><li>Size = $30 mil disbursed in 2001 </li></ul><ul><li>Blue Orchard (Swiss Investment Firm, not really individuals) </li></ul><ul><li>Investors: averaged 8% return to date, onlends @ market rates, </li></ul><ul><li>short term. Size = $12 mil </li></ul>
    • 29. Duck Examples – MFIs in the Capital Markets <ul><li>More Examples </li></ul><ul><li>Credit Unions generally, WOCCU specifically </li></ul><ul><li>Compartamos: $10 mil bond offering </li></ul><ul><ul><li>Mexican MFI Commercial Bank, ACCION affiliate </li></ul></ul><ul><ul><li>3 tranches, all fully subscribed </li></ul></ul><ul><li>Investments w/ Minimal Return, but Worth Mentioning </li></ul><ul><ul><li>Shorebank Advisory Services: Chicago CDFI, US domestic </li></ul></ul><ul><ul><li>Alterfin: Belgium bank offering secure CDs, then onlends them </li></ul></ul><ul><ul><li>Canadian Cred Union: FDIC insured savings (shhh!) </li></ul></ul>
    • 30. PICTURE Is the timing good for MFIs to access Capital Markets? $$$ in SR Funds (millions) US Interest Rates
    • 31. Recap <ul><li>Introduction </li></ul><ul><li>Investor’s methods for capital investments are different than donor’s methods </li></ul><ul><li>Investors as a market & their expectations </li></ul><ul><li>MFI typical behavior = barriers to investment </li></ul><ul><li>New approaches possible </li></ul><ul><ul><li>in language, structure & behavior </li></ul></ul><ul><li>Case Studies of MFIs & investment options </li></ul><ul><li>Our Duck </li></ul>
    • 32. Q & A Drew Tulchin Social Enterprise Associates www.SocialEnterprise.NET drew@SocialEnterprise.NET 617-872-0194 Thanks for listening, quack!

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