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PrintFeb 04, 2009
Microfinance investment outlook strong, despite financial market turmoil: CGAP, J.P. Morgan Report
The long-term outlook for equity investment in microfinance is positive, despite the financial crisis, says J.P. Morgan and CGAP (Consultative Group to Assist the Poor), a microfinance group based at the World Bank.
The analysis comes in a joint report, "Shedding Light on Equity Valuation: Past and Present," issued today that challenges conventional approaches to equity valuation in microfinance and establishes the first benchmarks for microfinance equity valuations. After a downturn in 2009, the report predicts that valuations will bounce back in 2010.
"Leading microfinance institutions, especially those with solid domestic funding from local deposits, should emerge stronger from the financial crisis," said Elizabeth Littlefield, CGAP CEO and a co-author of the report. "Microfinance managers will need to slow heady growth rates and be extra vigilant about arrears in loan portfolios, but the fundamentals of the sector, and the underlying credit worthiness of its low-income clients, are very solid."
Equity investment in microfinance has been growing quickly in recent years, and there are now 24 specialized microfinance equity funds globally. Until now, however, investors have lacked reliable data on valuation. The report offers a specialized approach to valuations for microfinance institutions (MFIs) that recognizes some key distinctions between microfinance and banks in emerging markets.
"Investors shouldn't be looking at valuations of microfinance institutions as they would traditional banks," said Nick O'Donohoe, Global Head of Research at J.P. Morgan and co-author of the report. "This report offers a new approach to microfinance valuation that recognizes some key distinctions between microfinance operations and banks in emerging markets. MFIs are double bottom line institutions, aiming for a mix of social and financial returns. This new valuation framework takes into account their strong asset quality, higher net interest margins, and higher operating costs."
The benchmarks featured in the report are based on a sample of 144 microfinance private equity transactions-the largest dataset of private transactions in the microfinance sector gathered to date-and data on 10 publicly traded MFIs and low-income consumer lenders.
The report shows that publicly listed microfinance lenders have outperformed traditional banks by 250% since 2003. But MFI valuations on the private market have varied widely-between 1.3x and 1.9x historical book and 7.2x and 9.2x historical earnings in the period from 2005 to September 2008.
"We hope this collaboration between CGAP and J.P. Morgan will provide useful guidance for both investors and microfinance managers," said Littlefield. "This may be one small step forward in developing local and international financial markets."
About J.P. Morgan
J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.2 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its J.P. Morgan, Chase, and WaMu brands. Information about J.P. Morgan is available at www.jpmorgan.com.
About CGAP
CGAP is an independent policy and research center dedicated to advancing financial access for the world's poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions and offers advisory services to governments, microfinance providers, donors, and investors.