Multilateral Investment Fund MIF

1
Multilateral Investment Fund (MIF)

• Established in 1993 to encourage the growing role
  of the private sector in Latin America and the
  Caribbean.
• Equipped with funding of US 1.3 billion, for
  both grants and investments to support
  small-scale, targeted interventions that pilot
  new approaches and act as a catalyst for larger
  reforms.

2
Small Enterprise
Investment Fund

• Uses equity, loans, and quasi-equity to promote
  small and microbusinesses in Latin America and
  the Caribbean.
• US 220mm committed in 35 venture capital funds
  and 18 microfinance institutions
• Seeking innovative approaches to solve old
  problems

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Capital Markets Case Study IBuilding a
microfinance industry

4
The experience of donors in making investments
in Latin American microfinance institutions?

• Donors took early risks of start-up institutions
  which private capital was unwilling to take.

5
Current Status

• Multilateral and bilateral agencies participating
  in specialized investment funds like Profund,
  Lacif, IMI, Gateway.
• Joint ventures by donors with Private,
  strategic investment seen in new entities like
  Bangente, VZ, FIE, Bolivia, Ecofuturo, Haitian
  initiatives.
• Many microfinance institutions are now active,
  recognized borrowers on local capital markets

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Challenges in mainstreaming the industry

• Confused, inconsistent legal, regulatory
  environments.
• Governance challenges caused by ownership
  structures, newness of the activity.
• Still, relatively little private capital involved
  to date because of high perceived risk.

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But!

• Continued sound performance by market leaders
  which are increasingly visible. Many mfis are
  the best performers in their financial sector -
  ROEs of over 15.
• Varied institutions at various stages of growth -
  healthy competition and stable, diversified
  funding sources
• Increasing interest by traditional banking sector.

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AND!

• More consistency in lending methodologies
  as best practices are proven.
  Actuarial analysis can be made.
• Development of new financial products that raise
  new opportunities for investment and
  diversification

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How to bridge gap between formal capital market
and the sector ?

• Capital markets are increasingly globalized.
  Investors have a wide area of investment
  opportunities and very little time to invest in
  choosing among alternatives.
• The industry needs to move toward
  standardization in terms of legal structure,
  methodologies, regulatory structures, etc.

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Attracting capital to the sector

• Transparency, consistency and high quality of
  financial information.
• Adviser, rating agencies, other third parties
  should evolve which can intermediate between
  entities and potential investors. MIF funding for
  this.
• Risk sharing with private sector DFL bond issue

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Capital Markets Case Study IIBuilding a
venture capital industry

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Building a Venture Capital Industry the
starting point

• Huge unmet demand by cash-strapped SMEs
• Incipient v/c industry with no track record
• Poor regulatory environment accompanied by, in
  some places, poor rule of law
• Investors could invest in high yielding
  government paper why invest in illiquid high
  risk instruments?
• Scarce pool of experienced v/c managers
• Poor exit environment small, illiquid stock
  exchanges - and lack of upside potential

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Building a Venture Capital Industry - The Goals

• Increase the pool of local v/c managers with
  track record
• Develop success-stories, best-practices, new
  locally-based models, market standards and
  benchmarks
• Attract private and institutional investors by
  demonstrating potential
• Raise awareness and v/c culture among businessmen
  and governments
• Improve regulatory environment

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Building a Venture Capital Industry Steps Taken

• A large portfolio of targeted v/c investments
  looking for strong demonstration effects 7
  funds in Brazil, 6 in Mexico, 9 regional
  vehicles, rest are country funds throughout LAC
• An increasing number of grant projects targeting
  structural and regulatory barriers
• Raising awareness among governments and
  key-players conferences Mexico, Brazil,
  Argentina
• Disseminating best-practices and
  lessons-learned

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Bridging the gap between formal capital markets
and the sector ?

• Closing the financial cycle by providing seed
  capital for the future LAC winners
• Providing the needed critical mass of v/c funds
  and managers to attract larger players
• Helping to put in place a more conducive
  regulatory environment
• Helping to develop new vehicles and instruments
  SBIC type models, quasi-equity finance, etc.

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Building a Venture Capital Industry - FINEP
Case Study

• Brazil Early 1990s
• v/c industry incipient
• Huge unmet demand
• No intermediaries to assist entrepreneurs
• Very few investors
• No organized market

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Building a Venture Capital Industry - FINEP
Case Study (Contd)

• Government paper paid very high rates
• No experienced v/c managers
• Overly regulated legal vehicle
• Poor exit environment small, illiquid stock
  exchanges
• Poor protections for minority investors

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Building a Venture Capital Industry - Steps
taken by MIF and its partners

• Finep/Sebrae/MIF/private participants signed an
  agreement to co-invest in new venture vehicles
  a funds incubator
• Finep Venture Capital Web portal to provide
  entrepreneurs/managers with market info
• Conduct a series of Venture forums for
  matchmaking
• Provide training
• Associate with other investors to document
  regulatory reforms
• Interface with Bovespa on creation of Nuovo
  Mercado

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Modest but important results since program began
one year ago

• Five new funds created out of thirty three
  proposals MIF committed 7mm.
• Funds had support of MIF, SEBRAE, FINEP but also
  at least 20 private investors.
• Awareness program hugely successful MIF
  provided 1.2mm
• Joint due diligence has resulted in a cohesive
  approach to recommending reforms in local fund
  legislation.

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Remittances channeling informal capital flows

• IDB estimates that 33 billion in remittances
  flow into Latin America and the Caribbean from
  international migrant workers
• Increasing opportunities for financial
  institutions to tap into these resources
• Opportunities for securitization of such funds
  Mexico and El Salvador
• MIF goals improve consumer welfare by reducing
  transaction costs and channeling funds into
  formal system. .

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Remittances MIF activities

• Research and awareness
• Brokering new relationships Japan/Brazil
  Ecuador/Spain US/El Salvador etc.
• Promoting new financial products, use of
  technology and expanding outreach.