New & Noteworthy
Following Up: Replies to Remaining Compartamos IPO Webcast Questions
ACCION did not have the opportunity to answer everyone’s questions during its recent Webcast on the Compartamos IPO. We were, however, able to capture those remaining questions verbatim, and have provided answers to them below.
1) I understand that Compartamos decided to keep its interest rates high in order to finance growth. Implication: Once they saturate the market, interest and profit rates could be cut. The current Compartamos P/E ratio implies some minimum expectation about future profit growth. Is this expectation consistent with the possibility that Compartamos will cut its profit rate when client growth slows? Or is the market assuming that won't happen? In other words, the rationale for high profit rate was "for now.” Is the market assuming "forever?”
This was a question that came up frequently during the IPO road show. The high valuation is predicated on the potential for continuing growth of total net profits. This profit growth is expected to come from several fronts:
1. More efficiencies—lower costs
2. Growth in clients, given the fact that Mexico is still a relatively untapped market
3. Wider range of products
4. Lower cost of capital as a bank
5. Increased leverage ratio
All of these factors would lead to growth in total net profits even if interest rates come down.
2) Carlos Labarthe [co-CEO, Compartamos] has said that Compartamos is not pursuing the active rolling out of savings products as (1) it is very expensive; and (2) they do not need the funds, given their profits. So, do the high interest rates de facto restrict the availability of crucial financial services to poor clients?
We cannot speak here for Carlos Labarthe and are not aware of this statement. Banco Compartamos is expected to begin offering a savings product before the end of this year.
3) When you mention that the investment was "oversubscribed" by 13X, does that mean that investors received 1/13th of what they wanted? Who decides who receives the shares when an offer is oversubscribed?
We mean that there was 13 times more demand for Compartamos shares than what was being offered. That is partly why the stock price has gone up so much after the IPO—a simple result of supply and demand.
The decision about the allocation (who gets shares and how many), as in any IPO, is done between the investment bank, in this case Credit Suisse, and the company, in this case Compartamos. There is discretion during the allocation process, and it is used to build an ownership mix that the bank and the company feel will work in the best interests of the company over time. As a result, some investors received a higher percentage of their request, while others received less.
4) [It] would be interesting to have [your] comment on the social value of operations—the slide mentions that this is part of the success of the offer, but [it was] not mentioned in the presentation.
The social element of the Compartamos operations was a factor in the success of the IPO, but not in a direct way. The investment managers have a fiduciary duty to produce the highest returns possible, and they saw Compartamos as an attractive investment because of its earnings potential. The social value of Compartamos was viewed by prospective investors as one of its business strengths.
5) Question from MIX: Can you tell us more about the costs of the IPO process for Compartamos?
The typical fee charged by investment banks for an IPO like this one is approximately 4% of the IPO proceeds. In addition, one has legal costs, auditors, the road show, financial advisors, etc. These other costs amounted to less than 0.5% of the proceeds of the IPO.
6) Has it not been felt during the process that part of “the profit realized in the IPO” also belonged to its loyal clients? If yes, has an initiative been considered to make these loyal clients profit as well?
The success of the IPO will attract significant competition to the sector. Clients will definitely benefit as competition increases, and they will gain access to more institutions offering financial services, improved service, a diverse range of products, and lower costs. In addition, many more clients will ultimately be served, both by Compartamos and by its competition.
We should view this landmark event within the context of the industry’s evolution—and compare it to the manner in which many industries have evolved. For example, the wireless telecommunications industry used to enjoy higher margins while offering service that was both more expensive and of lower quality. Client loyalty was critical to the success of its early years. But ultimately, more competition has ensued, from which we’ve all benefited.
7) ACCION's very high capital gains from selling a portion of its shares (even if they had sold their shares at book value) were the result of high retained earnings, fueled by high interest rates (willingly) paid by clients. What are the implications of initial/former Compartamos clients funding ACCION's development activities in other areas?
ACCION is mindful of the great responsibility and great opportunity created by the Compartamos IPO, but it should be very clear that the proceeds of the IPO came from nearly 6,000 investors in the public market, not the clients of Compartamos. We will use those proceeds to make risky investments and to provide capacity building for new MFIs in countries where microfinance is less developed and clients are very poor. We will use them to experiment with new products and services so that clients receive a full array of financial services. We will use them to work on behalf of the microfinance community as a whole in policy areas. We will also go beyond the bounds of our current operations in new, experimental ways. Overall, ACCION will use the success of Compartamos to help ensure that clients in many other regions gain access to financial services.
8) What was the $ valuation of Compartamos in the 1999 Gateway financing?
Approximately $6 million – book value.
9) To some extent, it would seem that the IPO was issued in a perfect storm of financial conditions, particularly highly liquid financial markets. Given that all investors approached invested, were any large blocks purchased by a single investor? If not, I would wonder how important the social value of the shares was to investors? That is, if large, qualified investors are investing very modest amounts, by their standards, in Compartamos, are the returns actually important to them? Or is it the public relations value? I suspect we will be seeing Compartamos featured in the annual reports of many of these investors in 2008.
The largest block purchased by an investor was approximately 1.9% of the IPO proceeds, i.e., approximately 0.6% of the total shares of Compartamos.
Compartamos’s social mission was definitely a factor in its success, but not in a direct way. Its social value was, and is, perceived as an integral component of its overall image as a stable, successful, well-managed business. Investment managers have a fiduciary duty to produce the highest returns possible, so they had to evaluate Compartamos on the basis of its earnings potential. We do not believe any of the investment managers bought into the IPO because of its public relations value, so we doubt you will see it featured in their annual reports.
10) In light of the success of Compartamos's IPO, could a similar path be followed by BancoSol in Bolivia in light of the high economic and political risk Bolivia currently faces? Please expand on your previous answer. (Previous answer: “Not right now.”)
It’s possible that other MFIs may follow in Compartamos’s steps. This would probably be positive for the industry. However, it depends on many variables. One of the key issues facing BancoSol, for example, is the current reluctance of international investors to invest in Bolivia – in general, and especially in sensitive sectors like microfinance – given the current government’s stance. It would not make sense for BancoSol to make a broad appeal to international markets under these circumstances, and the internal Bolivian market is very limited.
11) If one justification for high profits is that it attracts competition, which ultimately drives down interest rates, how can ACCION/Compartamos argue that it didn't want to lower interest rates because it didn't want to create a price war? Isn't this putting the interests of the MFI over that of the client? At what point will Compartamos deem it appropriate to lower interest rates? How will it know that the correct moment to lower rates has arrived?
ACCION does not take the position that the reason interest rates did not come down was to avoid a price war. Compartamos does need to be sensitive to its power in a market in which it is by far the largest provider. However, this would only apply to the manner in which Compartamos might reduce interest rates. A drastic and abrupt reduction could be disruptive. The more important question is whether Compartamos is now positioned to reduce rates.
Having succeeded in obtaining a banking license and firmly establishing itself in the capital markets, Compartamos now has a wide range of growth strategies available to it, and does not have to rely as much on retained earnings as it did in the past. Under these circumstances, Compartamos is already lowering rates in a responsible manner.
We believe that the success of the Compartamos IPO has brought an additional benefit, which is to raise awareness of the industry’s appeal. This will engender more competition, which will lower interest rates, and clients will be the ultimate beneficiaries.
12) Did any of the employees, management, or board benefit from the offering? I understand you indicated that no private investors benefited. How about ACCION staff or board?
The Compartamos employees and board members who benefited from the IPO made cash investments, using their own money, in Compartamos, in 2000. The Compartamos investment at that time was quite risky, and they put their own capital at risk. ACCION staff and board neither invested in Compartamos nor benefited.
13) What was the average cost of debt capital, just prior to the equity offering?
About 14%, in pesos.
14) In the current market, so much money is being raised. How long will it take to reinvest capital? I.e., for every dollar put into the ACCION fund, will it take 6 months, 9 months, 1 year, or more, to reinvest this capital? We're trying to get a pulse on the turnaround of investor money. Some of these investors are not patient, and we'd like to communicate the competition for good deals today. Can you please share with me the amount of time you expect money to sit idle (if at all)?
If you are talking about the proceeds that ACCION received from the IPO, we are currently exploring this exact question through a strategic review process.
15) Will Compartamos reduce interest rates if it has shareholders representing 30% of its owners who bought in because they saw 57% returns?
Rich Rosenberg’s paper [CGAP] argues that this will be true, and it is certainly the case that the new shareholders will want to keep share prices high, and Compartamos’ management will also be interested in Compartamos maintaining a strong share price. However, there are two key factors that temper his forecast:
1. Compartamos’s governance has not changed. Board representation is exactly the same as it was before the IPO. The new shareholders, being widely dispersed and each with very small ownership stakes, do not have a strong or unified voice.
2. Returns to equity holders will result from growth in total net profits, which in turn will come from a combination of factors, including:
--More efficiencies—lower costs
--Growth in clients, given the fact that Mexico is still a relatively untapped market
--Wider range of products
--Lower cost of capital as a bank
--Increased leverage ratio
In other words, pricing policy is not the only or even the main route to continued profits for Compartamos.
16) Can you provide any more visibility on potential MFI IPO pipeline [opportunities] broadly across all financial markets?
We would not speculate on that. A few MFIs exhibit strong financial performance and could be attractive to mainstream markets, but the question of whether there is interest or whether appropriate conditions exist for any of them to go public is not one that we can comment on at this time.
17) A question to Alvaro [Rodriguez, ACCION Board Chair] related to interest rate issues: Do Compartamos clients know that their interest rates are higher compared to some other MFIs in Mexico? If yes, then why do the clients choose to go with Compartamos? Has Compartamos done a study on this?
Compartamos clients have the freedom to go to competitors. Our market data and studies tell us that Compartamos charges rates similar to, or lower than, its competitors.
18) How might the public outing of these high returns cause a regulatory backlash in Mexico? (Public outing only means that the IPO brought attention to the high profitability, and this could have unintended consequences.)
We think the Compartamos IPO is great news for the fight against poverty, because once investors realize that microfinance can be profitable, more resources will be brought to the cause. This is a very positive outcome, and most see it this way. We are not aware of any possibility of regulatory backlash in Mexico.
Compartamos’s interest rates must be viewed within the context of overall Mexican interest rates. They are, in fact, relatively reasonable for that market. Finance companies in Mexico typically charge as much as 175% per annum, and some charge as much as 300%; interest rates at banks often run in the neighborhood of 60%.
19) In the paper by [Rich] Rosenberg of CGAP, ‘Reflections on the Compartamos IPO,’ he asks: “Was the aid money that was granted to Compartamos in its early years used inappropriately to enrich private investors?" According to his data, directors and managers of Compartamos had 23.7% of the shares. How many directors and how many managers benefited? What key issues and information could you provide to us to better understand the issues involved in their individual profiting?
The Compartamos employees or board members who benefited from the IPO (22 individuals in all) were those who made cash investments in Compartamos back in 2000. The Compartamos investment at that time was quite risky, and they put their own capital at risk. The original supporters of Compartamos are thrilled with the results of the IPO because they have seen their support create a great institution with a very promising future.
It should be noted that Mr. Rosenberg concludes, in his paper: “On balance, our view is that the public aid money given to Compartamos has not been inappropriately diverted to private pockets.” (p. 6)
20) How do you define poor?
ACCION’s poverty assessment methodology uses a range of reference points to look at the overall picture of poverty among MFI clients. These include various national poverty lines, as well as the international poverty line. Because all poverty lines are arbitrary and subject to extremely high measurement error, we believe that it is more useful to look at the entire distribution of income levels of clients, in comparison with the income distribution of the population. See ACCION’s poverty assessments written up in our InSight series, available through our website, www.accion.org. ACCION has not done a poverty assessment of Compartamos.
However, what is clear is that the average size of Compartamos loans is very low in relation to Mexico’s per capita GDP. On this measure, which is one of the key metrics used in microfinance to determine how far down-market an institution reaches, Compartamos reaches a very poor segment of the population. The average Compartamos loan, at $446, is 4.5 percent of per capita GDP. The worldwide average for all MFIs serving a poverty-focused market (the lowest of three categories on this dimension) is 16 percent. So even among poverty-oriented MFIs, Compartamos reaches a very low market segment.
21) Given Compartamos’s expected interest rate decrease and new-client growth (350,000 in 2008), is Compartamos making a strategic play at an increasingly up-market clientele? How will the decrease in interest rates impact Compartamos’s current poorer, less-profitable clients?
The current client base is still underserved, so there is no need to go up-market. Also, going up-market is not part of Compartamos’s mission. All Compartamos clients will benefit from lower interest rates.
22) What percentage of Compartamos's clients are considered ‘poor,’ and isn't 82% [interest rate] excessive?
ACCION has not conducted a poverty assessment of Compartamos clients, and therefore can’t give a percentage. However, what is clear is that the average size of Compartamos loans is very low in relation to Mexico’s per capita GDP. On this measure, which is one of the key metrics used in microfinance to determine how far down-market an institution reaches, Compartamos reaches a very poor segment of the population. The average Compartamos loan, at $446, is 4.5 percent of per capita GDP. The worldwide average for all MFIs serving a poverty-focused market (the lowest of three categories on this dimension) is 16 percent. So even among poverty-oriented MFIs, Compartamos reaches a very low market segment.
The interest rate charged by Compartamos is set by the market and is similar to what all microfinance institutions in Mexico charge. One needs to take into account the high costs of microlending—Compartamos spends about $0.35 for every dollar it lends. Additionally, one needs to factor in funding costs and the costs of non-performing loans. Clients also have to pay a value added tax directly to the Mexican government (not counted in the 82 percent), which is a major policy issue. The repayment rate of Compartamos clients is approximately 99.5%, which speaks to their strong ability to pay. We refer you to the analysis by Rich Rosenberg in the CGAP paper for more detail on Compartamos’ cost structure, competition and pricing.
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