Roadmap to Equity Investment

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Roadmap to Equity Investment

• Deborah Drake, ACCION
• Bill Harrington, MEDA

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Lots of capital for large, profitable MFIs

• Growth of equity lags behind debt
• Potential market of US280 bn from US17 bn today
• Concentrated in Top 3 of MFIs
• Concentrated in Latin America and Eastern Europe
• New capital providers

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What is equity?

• Equity is a part ownership in the company, unlike
  debt
• No predetermined cost such as interest
• No predetermined end such as a five year term
  loan
• Illiquid ? patient ? risky
• ? More expensive than debt

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Equity fund

• Usually a partnership between investors (called
  limited partners)
• And the management (called the general partner)
• Usually a ten year life
• Investors attracted based on general partners
  history and promised returns

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Equity requires transformation
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Equity investors look for

• Financial performance
• Size
• Good governance
• Ability to liquidate the investment exit
• For strategic investors
• Social performance of MFI
• Relationship to strategy

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Investment Process for Private Equity

• Portfolio Strategy
• Deal Flow
• Evaluation of Potential Deals
• Term Sheet
• Due Diligence
• Closing

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Investment Criteria

• Size of transaction
• Size of company
• Profitability
• Solvency
• Sustainable competitive advantage
• Double bottom line ??

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Sample Term Sheet

• Who, what and when
• Amount and price
• Conditions before the deal
• Assurances (representations and warranties)
• Special conditions (if.)
• Board, governance, veto rights

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After Closing

• Financial Performance
• Social Performance ??
• Participation in Governance -- Possible Board
  Seat
• Adherence to Mission
• Expansion

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Exit

• Sale to a Third Party
• Sale to a Third Party Identified in Advance (Put)
• Sale of the Company
• Management Buy Out