India's microfinance-focussed private equity fund managers are now diversifying their investment base into newer areas of social investing as they raise new vehicles. These funds are investing in areas from healthcare services to rural supply chains to even rural business process outsourcing plays. With microfinance coming to the portfolio of mainstream investors with the impending public offering of SKS Microfinance, the search for the next emerging game-changer for these fund managers has already begun.
Fund managers like Aavishkaar Venture Management Services Pvt Ltd, Caspian Advisors Pvt Ltd, Elevar Equity Advisors Pvt Ltd and Lok Advisory Services Pvt Ltd have raised or are looking to raise new funds which will have a broader focus beyond credit. While the focus of these funds continues to be microfinance, they will also look at broad spectrum of areas such as micro-insurance, micro housing finance, remittances, mobile payments and services in education and healthcare.
Areas like low-cost housing finance could be potentially larger than MFI plays. The demand for affordable housing in India is huge as Planning Commission has predicted a shortfall of 25 million homes but there are no institutions serving the mortgage needs of the lower income segment. The area has already seen investor interest with Micro Housing Finance Corporation attracting Rs 25 crore funding from India Financial Inclusion Fund (IFIF) and Michael and Susan Dell Foundation.
Recently, Lok Capital, which has been active since 2006, made its first investment outside the MFI space by putting an undisclosed sum in rural outsourcing firm RuralShore Business Services Pvt Ltd, which plans to set up 500 rural business processing centers across the country in six years. Lok, which is currently investing from its $22-million fund, has investments in several MFIs including Spandana Sphoorty Financial Ltd, Bhartiya Samruddhi Finance Ltd (part of Basix) and Ujjivan Financial Services Pvt Ltd.
Venky Natarajan, managing director at Lok, feels that there are businesses which can bring benefit to the MFIs dealing with issues of bringing down the cost, improving productivity, expanding outreach, hiring talent, among others. "All these are issues with MFIs today and to deal with them you need to build the entire ecosystem," he says.
"Development does not come by providing finance, but it comes by creating infrastructure. Microfinance is not the solution to everything but just one of the triggers," said Vineet Rai, founder and the CEO of Aavishkaar, one of the pioneer in the social investing space. The firm is currently looking to raise $100 million for Aavsihkaar Goodwell II, which will invest in technology enabling and housing finance companies in the social context besides MFIs.
"You cannot do more of the same as quality entrepreneurs are few," added Rai. Aavsihkaar already has investments in sanitation, healthcare, rural outsourcing through its micro venture capital fund.
Another player is Elevar, which recently raised $70 million for Elevar Equity Fund II at $70 million. "Our role is to catalyse new products and services which have a fundamental impact as far as poor communities are concerned. Since we want to look at the impact side, we are actively looking for investments in teams outside of credit," said Sandeep Farias, managing director at Elevar.
Besides MFIs, Elevar has invested in Moksha Yug Access India Pvt Ltd (focused on rural supply chains) and Comat Technologies Pvt Ltd (delivering government service to rural communities) from its first and second fund, respectively. Elevar also invests in other countries like Mexico, Philippines and Peru.
India Financial Inclusion Fund (IFIF), which is advised by Caspian Advisors, and raised $90 million fund last year, besides its recent investment in MHFC, has also invested in A. Little. World. Pvt Ltd, which provides a mobile phone based branchless banking platform.
As Indian MFIs have matured, they have been attracting investments from a variety of investors like the sector-focused players to sovereign wealth funds like Temasek to hedge funds like Sandstone Capital and venture capital majors like Sequoia. Indian MFIs have attracted the strongest investor interest with 30% of all microfinance equity transactions in 2009, according to a report by CGAP, a microfinance group based at the World Bank, and J.P. Morgan.
The study added that equity valuations for Indian MFIs are trading at nearly six times their book value, or three times the global median. But these investors say valuations are not the reason for them to look at areas beyond microfinance.
By broadening their investments, MFI funds could be looking at diversifying possible risk from a concentrated credit portfolio. But one could counter this by saying that these funds are increasing since the new areas are still to emerge. "Some of these sectors still need to evolve as full fledged verticals," said Farias.
Also, most of these investors have an active deal pipeline in the social sector since they have been entrenched in the space for some years. There could also be synergies between microfinance and rural business, where the sector focused investors can help portfolio companies through their experience and network. "Strategically these companies would want to build a network with MFIs, which makes it easier for them to narrow down their choice of investors," said Natarajan.
