AlitheiaCapitalWorkshop Whatiscapitalstructure? D bt I DebtInvestments t t EquityInvestments q y GettingInvestments 40Slides Whoarewe? Who are we? 1 Presenter 4 4 Sections 2Hours 1Hand out 0Breaks ??? Questions? NigerianInvestmentManager,basedinLagos b ManagesNigeria’sFirstMicrofinanceEquityFund Alsomanagesmandatedrefinancefunds Started2006byTokunbohIshmaelandJumoke Akinwunmi Partnerswithinternationalmicrofinanceinvestors Gets money from international development finance Getsmoneyfrominternationaldevelopmentfinance institutions IntroducingtheimportanceofcapitalstructureinfinancingyourMFB Introducing the importance of capital structure in financing your MFB Tenure Cost Deposits= D i WorkingCapital ki i l Refinance= Working Capital WorkingCapital Volatility Deposit Debt Equity= q y Equity TooMuch Refinance TooMuch q y Equity TooMany p Deposits HighFinancial CostRatio i Lowerreturnto Shareholders Shareholders (ROE) HighOperating Costs Needfor strengthened ALM A M Reduced growthrates High operational volatility Deposits Refinance Equity • Eligibilityof raisingdeposits ii d it • Maximum amount restrictedbyCAR t i t d b CAR • Limitsaccessto capitalsources it l • Maximum amount restrictedbyCAR t i t d b CAR • Minimum d fi d b CAR definedbyCAR andCapital Requirement • Restrictionof R t i ti f concentrationof holding • Restrictionof R t i ti f shareholders • ImpactonProfit andLoss dL Infrastructure, New Business Internall Stakeholdersdemands Shareholders Clients Ageofthebank AccesstoDeposits TargetMarket External AccesstoFundingTypes Regulation Kenya Nigeria Cameroon 5% 17% 26% 35% 31% 39% 64% 26% Mix Market, 2010 57% 1600 AMFB BNGO CMFB 1% 9% 1200 18% 28% 29% 17% 1000 800 600 71% 74% Deposits Refinance Equity 1400 54% Depositsgrow linearover time Equity investmentsets offgrowthspurt 400 200 Borrowings Deposits Equity 0 2012 2013 2014 2015 2016 Raisesrefinanceon thebackofequity i investmentand t t d 2017 2018 strongperformance Mix Market, 2010 Howtoraisedebt How to raise debt Loancapitalwithout L i l ih externalrefinance L Loancapitalwith it l ith externalrefinance Re financing your Refinancingyour loanswithexternal debtmeansthatyour MFBdoesnotneedto relyondepositors and can grow faster andcangrowfaster LocalBanks • Standard Chartered • Citibank • Stanbic IBTC Senior Loans S b di t d L Subordinated Loans Microfinance Investment Vehicles • Blue Orchard • ResponsAbility • Incofin • Triodos Mandated Funds Term Loan Certificate of Deposit Unsecured U secu ed Working Capital Loan • Alitheia Capital Line of Credit Bridge Loan Overdraft Maturity BASICASSESSMENT BASIC ASSESSMENT Character Collateral CashFlow Capacity Conditions WHATDOESTHISMEAN FORMFBs? InterestRatedependsonperceivedrisk Ratingisadeepassessmentofinstitutionalstrengths f l h andweaknesses Standard & Poor’ss,FitchandMoody Standard&Poor Fitch and Moody’ssarewell are well knowntraditionalinternationalratingagencies Microfinanceequivalentexists:MicroRate,MCril, q , , PlanetRating,Microfinanza RatetheMFBincontextofindustry,againstpeers y g p Assessstrengthsandweaknessesof5C’s Resultssharedwithinvestorstobuildinvestment case Howtoraiseequity? How to raise equity? Guarantor Guarantor 1. Guarantee % of loan Lender/ Investor 3A. Guarantor pays predetermined amount if MFI defaults 2. Disburses loan to MFI MFI 3. MFI repays lender Grameen FoundationisanexampleofaGuarantor Infrastructure Infrastructure Newbranches NewComputers,MIS,orPOS New Computers, MIS, or POS NewTransportEquipment HumanCapital Addingmanagementcapacity Providingskilldevelopment Refinancing Loans RefinancingLoans Private Investors I t International ti l Microfinance Investment Vehicles • Incofin • Blue Orchard (no investment to date) Donors/State actors Eq it Equity Capital • LASMI • UNDP L l Local Microfinance Investment Vehicles • Alitheia Capital Whatyoucanexpectfromequityinvestorsdependson h f theirbackground.Potentialvalueaddincludes: Strategicguidancethroughboardseat Strategic guidance through board seat Accesstotechnicalresourcesforimprovementsto MISetc. Potentialaccesstofundernetworkforgrants Accesstofundernetworkforrefinanceandmore equityasrequired Representationatdomesticandinternationalbodies 1000 900 800 700 Debt Equity GrossLoanPortfolio Gross Loan Portfolio 400 2nd: $11.5mn 300 First external equity: $3.2mn 0 2004 Mix Market, Wikipedia, SKS, indiamicrofinance.com, vccircle.com 2005 2006 Source USDMillio ons 4th: $75mn 3rd: $30mn 500 100 IPO: $358mn Valuation: ~$1.5bn 5th: $10mn 600 200 Investorshelpshapeyourcompanyafterbuyingapart h l h f b Notabletoridthemunlessyoucanbuythemout Boardseat,vetorights,etcgiveinvestorsasay B d t t i ht t i i t ConsiderFollowingfactorsbeforemakingadecision Doyousharethesamegrowthtargetsandstrategy? Do you share the same growth targets and strategy? Doyouseeeyetoeyeonthekindofcustomersyou wanttotargetandproductsyouoffer? g p y Havetheygotthecapacitytogrowwithyou? Doyoulikethewaythehandletheirinvestees? y y 2007 microfinance investors and individuals 2008 VC/PE 2009 2010 2011 Strategic Investor Secondaries Trackrecord k Historicalfinancialperformance Growthprofile Management Stability,depthandrelevanceofexperience GoodGovernanceandtransparency G GrowthPlan th Pl Ambitionanduseoffunds Matchinvisionandmission Public Investors CommonShares:Plainequity C Sh Pl i it DifferentClasses:Someclassesmaycarrymore voting rights than others votingrightsthanothers CouldincludeSweatandMembersEquity PreferenceShares:Sharesthatcarrypreferential yp rightstodividend(fixed)andwindup Options:Cumulative,Redeemable C ConvertibleDebt:Debtthatcanconverttoeither tibl D bt D bt th t t t ith commonorpreferencesharesuponanagreedtime PublicShares:Publiclytradedsharedfollowingthe y g IPOaresimilartocommonshares Severalmethodologiescangiveyouanindicationof l h d l d f whatyourcompanyisworthtoday PricetoEarnings(P/E):ProfitafterTaxxMultiple Price to Earnings (P/E): Profit after Tax x Multiple PricetoBookValue(P/BV):NetAssetsxMultiple NetAssets=Equityinvestments+RetainedEarnings Net Assets = Equity investments + Retained Earnings Multiplesaresetbynegotiation Highlydependentonyourcompanytrackrecordand outlook GeneralGuidance:P/EMultiple=0.81.2 DoesyourMFIhave: h ResponsibleGovernanceprocedures? ClearOwnershipstructures? ATransparentandOpenapproachtoreporting? AClear,AmbitiousandAchievableBusinessPlan? ADeepandExperiencedManagement? Apositivetrackrecord? AvailableDocumentation(financialstatements, profiles,projections,etc) Anindependentboardcapableofprovidingstrategic b bl f directiontotheMFI,monitoringanddevelopingthe management Cleardecisionmakingprocessesandmonitoring systems y Awarenessoninvestorpreferences,expectations Coulddemandboardseat/nominateindependent p directors Mighthavepreferencesoncoinvestors,board members Goodaccountingpractices Good accounting practices Internationalandlocalaccountingstandards Generationofregularfinancialstatements g Regularaudits Conductandpublishregularaudits UseExternalrecognised Use External recognised auditors(E.g.KPMG) auditors (E g KPMG) Trackandcommunicatetherightperformanceindicators E.g.NetIncome,AROA,AROE,Portfolioatrisk Documenttargetsversusactualperformance,identify l f d f discrepancies Institutionalratingsbyaccreditedagenciesboostcapital providersconfidence id fid Founder’s/investors’reputations ’/ ’ Definedownershipstructureandregulatedlegal form Awarenessonownershipstipulationsofinvestors E.g.Investorscouldstipulatemin.ormax E g Investors could stipulate min or max investmentamountsandownershippercentages E Example Howdoesmyorganizationmakeinvestmentsareaility How does my organization make investments a reaility ACLEDA Investors Holding Board Seats BoardSeats ACLEDA NGO 46.23% 3 ASA 4.77% 2 DEG,FMO,IFC, Triodos 12.25% 1each Audits A dit Whenconducted Wh d t d CentralBanksupervision Continualatallbranchofficesandcentraloffice CGAPFormatappraisals Yearly Clientsatisfactionsurveys Twiceayear CreditRating Continual(asrevalidationCreditratingisneeded) Donor Monitoring DonorMonitoring Quarterly and annual (UNDP) Quarterlyandannual(UNDP) Duediligence Foreachinternationalcommercialinvestment Financialaudit Yearly Continual (internal but reports to Board General Continual(internalbutreportstoBoard,General Assembly) Internalaudits ProceduresAudit Yearly(conductedbythefinancialauditcompany) Social welfare inspections Socialwelfareinspections Continual at all branch offices and central office Continual,atallbranchofficesandcentraloffice Taxinspections Continual HaveaPlanthat: H Pl th t ShowswheretheMFIseekstobein5years Setsrealisticanddynamicprojections,basedon Sets realistic and dynamic projections based on soundassumptions Reflectsmission,policies,marketsituation Reflects mission, policies, market situation analysis,macroandregulatoryenvironment, productsofferings,sensitivityanalysisand5year fi financialprojections i l j ti Communicatesthatmanagementisawareofall risks BeClearofyourObjectives: l f b IwantthemoneyIrrespective Iwantthemoneyonyourterms I t th t IwantthemoneyandIhavesomenonnegotiables but am willing to compromise to some extent butamwillingtocompromisetosomeextent Neversnapthenegotiations Identifyinvestor’sintentassoonaspossible Articulateyourtermsinalogicalmannertotheinvestor Knowyourbottomlineifyouarewillingtocompromise Comeupwithcompromises C ith i AndreWegner [email protected] www.thealitheia.com