Singapore, Southeast Asia’s wealthiest nation, is seldom uttered in the same breath as microfinance. After all, microfinance delivers financial services to people who subsist on fewer than US$2 daily and are too impecunious to get the attention of mainstream banks, insurers and other financial-service providers.
But in July, BV Narasimham will be moving from India to Singapore to seek new microfinance markets and assets in neighbouring countries such as Vietnam, Indonesia and the Philippines. Thus far, the bulk of the world’s microfinance investment dollars flow into Eastern Europe, Africa and South America. Asia, with perhaps the exception of India, remains largely unexplored.
Narasimham is a director with Caspian Advisors, which was established in 2004 to manage funds that invest specifically in microfinance institutions. Caspian, based in Hyderabad, launched India’s first microfinance private equity fund, the US$20-million Bellwether Microfinance Equity Fund in 2005. The fund has three main investors: the Netherlands’ FMO and Hivos-Triodos Fund and the US’ Gray Ghost Microfinance Fund. Caspian has since launched another India-focused fund that takes equity stakes in microfinance institutions, with a target capital of US$100 million.
Viswanatha Prasad, founder and managing director of Caspian Advisors, says recent microfinance equity funds project gross internal rate of returns (IRR) of 10% to 25%, on a US-dollar basis, which is not far from the 20% to 30% IRR required by most emerging-market private equity investors.
That is a significant improvement from the 4% to 5% IRR achieved by the earliest microfinance funds. These days, up to 25% returns are possible over 10 years because microfinance institutions have gained efficiency. And at Caspian, “we invest in early stage or start-up microfinance institutions and we work closely with the management and sit on the board to guide development. To help them grow over five to seven years, we have a hand in designing systems, products and operations to ensure there is a solid institutional structure that can scale,” says Prasad.