Notwithstanding the blockbuster stock market debut of portfolio firm SKS Microfinance, Elevar Equity Advisors, which manages the $23.6-million Unitus Equity Fund (on behalf of Unitus) and the $70-million Elevar Equity Fund II (raised by Elevar), is actively considering investments beyond the much-penetrated MFI space to other base of the pyramid businesses such as low income housing, education, healthcare and other financial services. In an interview to VCCircle, Elevar Equity co-founder and managing director Sandeep Farias, who actually founded Unitus’ India operations in 2004, says there would not be any impact of Unitus’ move of exiting MFI activities on the funds Elevar is managing. Farias along with Chris Brookfield, Maya Chorengel and Johanna Posada founded Elevar in 2008 and launched Elevar Equity Fund II, attracting anchor investments from Omidyar Networks and Legatum. Farias, who holds an integrated law & arts honors degree from the National Law School of India University in Bangalore, is the former head of the corporate and development sector teams at Nishith Desai Associates, a multi-disciplinary law firm. Farias talks about MFI valuations, consolidation challenges, Elevar’s diversified investment strategy and portfolio companies. Excerpts:-
How do you assess the recent move of Unitus backing out of microfinance activities? What does it mean for its fund that you are managing?
Elevar is a socially responsible investment company founded by Chris Brookfield, Maya Chorengel, Johanna Posada and myself. Unitus, that had set up the Unitus Equity Fund (UEF), sub-contracted with Elevar to manage the Unitus Equity Fund (UEF), a decision that assured management continuity as Chris and Johanna had managed UEF from its launch in 2006. We are pleased that UEF is not impacted (by the decision of Unitus to exit microfinance) and that the sub-contracting relationship with Elevar will continue to be in place.
Soon after Elevar was founded in 2008, we launched our own fund, Elevar Equity II, to invest in social businesses in India, Latin America and SE Asia. This fund, which closed in 2009, is not impacted by their decision to exit microfinance as it was raised by Elevar and is independent of Unitus. We are currently investing from this fund.
What does the SKS IPO mean for the sector as a whole? Will we see a rush for more IPO exits?
Till even a few years ago, it was unclear whether microfinance could scale beyond a point – since there wasn’t enough capital in the philanthropic world. Even the private equity world was not able to meet the capital needs of institutions like SKS. SKS has demonstrated that a social venture can attract public markets providing the working poor with access to cheaper capital on a significant scale. For the same reason, it is reasonable that other large MFIs with ambitious growth plans, the right governance and quality processes will consider IPOs.
There is a view that microfinance valuations may be heady and unrealistic?
By investing in microfinance, public and private investors are showing confidence that the India’s growth and expansion will deepen and will include the poor. Valuations are also a reflection of the community network nature of microfinance, market size, growth rates, high volume and low margin business model and few limited quality investment opportunities that focus on the 4 billion around the world that have limited or no access to basic services. In 2006, when we started investing, people wondered whether exits were even possible. In four years, we had a successful IPO. The challenge is to create more such opportunities - not just in microfinance but in other services that the poor value.
Do you think consolidation will emerge as a model in Indian MFI sector or is it still easier to raise an entity grounds up?
The market in India has not been evenly penetrated and still has demand supply gaps. Therefore organic growth by
MFIs should continue to prevail over consolidation opportunities. This does not mean consolidation will not happen in some cases – provided cultural and systems differences between institutions can be overcome. Consolidation discussions have taken place in the past but have not been consummated as management teams have thus far determined that organic growth is simpler and less expensive. It is difficult to predict when consolidation will become easier than organic growth.
What are the focus areas for Elevar Equity? Are you actively chasing investments beyond microfinance?
We started to consider investments in broader social ventures and not just MFIs in 2008 itself – when we launched our own fund, Elevar Equity II. Our interest has always been to leverage our understanding of the base of the pyramid customer to support entrepreneurs delivering various services that meet the needs of the poor – and are indeed, being demanded by the poor. We decided to focus on what we do best – identifying, backing and motivating social entrepreneurs to venture into new fields and pilot innovative business models to deliver high impact services to the poor. Importantly, through the current fund, we have invested not just in MFIs but also companies that provide micro enterprise/livelihood financing, information services and convenient payment solutions to the poor.
We also continue to look at housing, education, healthcare and other financial services oriented towards the base of the pyramid.
MFI focused funds are now spreading their wings to cover non-microfinance and larger social ventures? What are the sub-sector opportunities you are looking at in India?
Many of the products and services that the poor seek need specialized companies and entrepreneurs with domain knowledge. Fortunately, in India, there are a number of high quality social entrepreneurs seeking to deliver cost efficient and high quality services to the poor. We believe India will lead the world when it comes to demonstrating business models that work for the poor. Investors will have different reasons for diversification beyond microfinance. The success of microfinance to attract large sources of capital from mainstream funds and risk mitigation could be motivating some MFI focused funds to diversify.
At Elevar, we decided to diversify in 2008, because of what we heard from customers in the field – customers wanted quality services beyond microcredit loans. In India, we are seeing more activity in low income housing (both real estate development and finance), education, healthcare and other financial services beyond micro-credit. We are also finding ourselves more drawn to earlier stage investments in India as we see tremendous value in working with entrepreneurs to hone their business models as they provide new services to the poor.
Elevar Equity is a cross-border investment play? Is there scope for cross-border collaborations for your portfolio companies?
One of our strengths, and a differentiator, is our global focus. We have made investments in social ventures in India, Brazil, Mexico and Peru. We have looked at opportunities in the rest of South Asia, parts of Africa, Indonesia, China, Columbia and the Philippines. Our experience in one country informs our strategy in another. For example, the individual lending methodologies, which are the norm in Peru, informed our understanding of the more sophisticated credit analysis required for micro enterprise lending or housing finance in India. Likewise, the work we did to understand the Indian payments space informed our investment in a payments company focused initially on the Peruvian market. Our global presence also allows for the sharing of best practices and experiences among our portfolio companies.
What are the key updates from your portfolio firms?
Apart from the successful IPO by SKS, our other portfolio companies continue to innovate. Madura Microfinance, India’s lowest cost provider of microfinance, is rolling out education initiatives to enhance the business skills of their customers and will be increasing the connectivity and networks between their customers. Ujjivan Financial Services, the pioneer of urban microfinance, achieved profitability and announced a lowering of interest rates it charges clients.
Vistaar, our recent investment, is focused on developing products that are linked to the cash flows of specific livelihoods. Grama Vidiyal has successfully rolled out an individual lending product to its longer-standing customers. Moksha Yug continues to focus on its dairy supply chain business. Swadhaar is now focusing on growing having understood how to work in the Mumbai market. GloboKasNet, our latest investment focused on Peru, is rolling out a multi-platform banking correspondent network equipped with technology and training to deliver transaction capabilities to clients of banks, MFIs and other non-financial companies.