This document summarizes key aspects of investing in emerging markets using microfinance as an example: - Microfinance involves providing small loans and basic financial services to low-income individuals and businesses. The industry has grown significantly but also faces political, economic, and commercial risks in emerging markets. - Investors have deployed billions to support microfinance institutions but must mitigate risks like foreign exchange fluctuations, reputational harm, and difficulties exiting investments. Strategies include political risk insurance, currency hedges, due diligence, and negotiated exit options. - Some microfinance organizations have successfully transitioned to larger commercial operations and even public listings, demonstrating how impact investing can achieve financial returns alongside social goals in emerging economies.

1. TBLI Conference
January 23, 2015
Investor Challenges
in Emerging Markets:
Lessons from the
Microfinance Industry
Paul Christensen
Clinical Professor of Finance

2. Microfinance Defined
• “Making small loans, usually less than $200, to groups of
individuals, usually women, to establish or expand a small, self-
sustaining business” - Grameen Foundation
• “The supply of loans, savings, and other basic financial services to
the poor” - CGAP
• “Banking and/or financial services targeted to low-and-moderate
income businesses or households, including the provision of credit”
- ACCION International
• “The provision of a broad range of financial services such as
deposits, loans, payment services, money transfers, and insurance
to poor and low-income households and their micro-enterprises”
- Asian Development Bank
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3. Overview of the MF Industry
• Globally, there are over 10,000 formal microfinance
institutions operating in nearly every country
• The vast majority of MFIs started out as mission-driven,
non-profit organizations (NGOs)
• Approximately 750 companies have successfully
transformed into larger scale commercial operations
serving 80% of the market
• Total industry assets have grown from $7 to $100 billion
since 1996 (20% CAGR)
• International finance institutions, commercial banks and
microfinance funds have invested billions of dollars in
MFIs to support their growth
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4. ShoreCap International
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2003-2014
Investors
Investee Locations
• Afghanistan
• Armenia
• Bangladesh
• Belarus
• Cambodia
• The Gambia
• India
• Kenya
• Mongolia
• Nigeria
• Pakistan
• Philippines
• Rwanda
• Tajikistan
• Uganda
Evslin
Family
Foundation

5. Risk-Return Trade Off
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Source: BNY Mellon Investment Strategy and Solutions Group, 2014
Expected Return
StandardDeviation
US Treasury Bills
US Equities
US Real Estate
Corporate Bonds
Municipal Bonds
Hedge Funds
US Venture Capital
US Private Equity
Emerging Market
Equity

6. Emerging Market Risks
Type of Risk Mitigation Strategies
• Political Risk Political Risk Insurance
• Foreign Exchange Risk Hedges, Swaps, Portfolio
Diversification
• Reputation Risk Due Diligence, Background Checks
• Commercial Risk Contracts, Board Seats,
Minority Voting Rights
• Exit Risk Put Options, Block Sale and IPO
Agreements
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7. Political Risk Insurance
• Currency inconvertibility
• Expropriation of assets
• War and civil disturbance
• Breach of government contract
• License cancellation
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8. FX Portfolio Example
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Impact of FX Movements A B C D E F G
Local Currency Denomination Taka Rupee Shilling Dram US Dollar Tugrik Somoni
Exchange Rate at Closing (FX/USD) 58.4 45.8 81.6 447.0 1.0 1,215.0 3.20
Exchange Rate Today (FX/USD) 71.3 44.0 70.0 363.5 1.0 1,165.0 3.43
Change in Value of Local Currency (18.1%) 4.1% 16.6% 23.0% 0.0% 4.3% (6.8%)
Price / Share at Closing (in FX) 100.0 10.0 720.0 35,854 10.0 1,561.1 30.0
BV / Share at Closing (in FX) 97.8 10.7 760.0 36,158 10.0 1,632.1 37.0
BV / Share Today (in FX) 198.6 12.7 871.9 44,257 14.3 1,848.0 50.0
Real Growth (Loss) in BV / Share 103.1% 19.1% 14.7% 22.4% 42.6% 13.2% 35.1%
USD Growth (Loss) in BV / Share 66.4% 23.9% 33.7% 50.5% 42.6% 18.1% 26.0%
FX Gain (Loss) in Investment Value ($538,901) $26,742 $144,485 $425,325 $0 $54,247 ($97,438)
Portfolio Companies
Source: ShoreCap International Investor Reports

9. Due Diligence
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Received N/A
I. Financial Statements
A. General
1. Audited financial statements for the last three (3) years _____ _____
2. Comparison of Audited financials statements (above) to yearly budget _____ _____
3. Interim statements for most recent period with comparison to prior year _____ _____
B. Asset Reports
1. Loan portfolio breakdown by product type or line of business _____ _____
2. Inventory of fixed assets owned including additions, disposals and depreciation _____ _____
for last three (3) years
3. List of other assets and pre-paid expenses with valuation methodology _____ _____
C. Liability Reports
1. Deposit breakdown by type of product and maturity dates _____ _____
2. Aged listing of accounts payable and accrued liabilities _____ _____
3. Listing of all debt including principle balances, lender name, interest rate, _____ _____
terms and conditions
4. Copy of any lease agreements _____ _____
5. Description and amount of any contingent liabilities and off-balance sheet items _____ _____

10. Managing Commercial Risk
• Board representation or observation rights
• Supermajority voting rights
• Investment phasing / tranches
• Amended charter / articles of incorporation
• Shareholder agreements
• Side letters
• Technical assistance plans
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11. Investment Exit Options
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• Put option to other shareholder(s)
• Management buy-out
• Employee buy-out
• Block sale agreement
• Trade sale / strategic buyer
• IPO / share listing

12. Microfinance IPOs
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Company Country Year
Market Value
at Time of Offering
BRI Indonesia 2003 $1.2 billion
BRAC Bank Bangladesh 2006 $25 million
Equity Bank Kenya 2006 $90 million
Compartamos Mexico 2007 $1.6 billion
SKS
Microfinance
India 2010 $1.5 billion
Sources: Council of Microfinance Equity Funds, Ira Lieberman, May 2008,
CGAP Focus Note, September 2010