The following post was <a href="https://nextbillion.net/caveat-venditor-a-new-model-for-buyer-selection-in-responsible-microfinance-equity-exits/">originally published</a> on NextBillion.

<img class="wp-image-25527 alignleft" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/architecture-door-entrance-277552.jpg" alt="" width="615" height="461" />For most, socially responsible investing means just that – investing in a manner that not only generates financial returns but also produces positive social value. But what does it mean for an investor to be “responsible” when selling their holdings? How does one stay responsible at the very moment when one ceases to be an investor?

This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their 10-year terms and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a <a href="http://documents.worldbank.org/curated/en/914731468154465262/pdf/805400NWP0CGAP00Box385295B00PUBLIC0.pdf" target="_blank" rel="noopener">2014 paper</a> commissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes.

With another four years of multiple exits under the sector’s belt, <a href="http://www.inclusivefinanceplatform.nl/home" target="_blank" rel="noopener">NpM, Netherlands Platform for Inclusive Finance</a>, along with the <a href="https://fiecouncil.com/" target="_blank" rel="noopener">Financial Inclusion Equity Council</a> (FIEC) and the <a href="http://www.e-mfp.eu/" target="_blank" rel="noopener">European Microfinance Platform (e-MFP)</a> asked us to take a closer look at one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is <a href="http://www.e-mfp.eu/sites/default/files/resources/2018/04/Buyer%20Selection%20in%20Responsible%20Microfinance%20Exits.pdf" target="_blank" rel="noopener">Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits </a>– a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.”

The research – an investor survey, several in-depth interviews and a workshop during <a href="http://www.european-microfinance-week.eu/2017/" target="_blank" rel="noopener">European Microfinance Week</a> – found a mix of approaches applied by different investors. But these nevertheless shared many common elements aimed at making sure that the buyer will honor and pursue the social mission of the institution being sold. We consolidated these elements into a “Conceptual Framework for Buyer Selection” – a flowchart representation (plus explanatory notes) of the steps and criteria inherent in responsible buyer selection in microfinance equity exits.

<img class="aligncenter wp-image-25535" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/table.png" alt="" width="615" height="797" />

Overall, the consensus among investors was that social responsibility in the context of an exit largely means excluding those potential buyers who are deemed unsuitable and then applying the financial offer (how much a buyer is willing to pay) to select among those remaining. But that exclusionary process is driven by exceptionalism, i.e. buyers have to be obviously unsuitable to be eliminated from consideration, and such exclusions tend to be rare, based on factors like unclear ownership of the buyer, inability to trace the source of the buyer’s funds or suspicion of the buyer’s motives. And because such cases are rare, what this means in practice is that the financial offer is the dominant factor in the decision, much as in the world of purely commercial investors. We refer to this by a term borrowed from medicine, the First, Do No Harm principle.

However, there was an important dissenting view among some investors, which holds that the Do No Harm exclusionary criteria are insufficient for a social investor. After all, a commitment to a social mission is a positive one; it must do good, and not simply avoid doing harm. In effect, this view seeks to invert the process, first deciding whether the financial offer meets the selling investor’s predefined financial objectives, then considering its value to the institution’s social mission. That value need not be strictly mission-driven, nor is there any expectation that the ideal buyers are socially motivated NGOs. Rather, the question is of organizational fit. Extending the <a href="https://medical-dictionary.thefreedictionary.com/best+interest+standard" target="_blank" rel="noopener">medical analogy</a> somewhat, we call this the Best Interests approach. We believe that this model, with its positive obligation on the seller(s), is better aligned with pursuing a social mission while delivering a reasonable financial return – which is at the core of the social investment value proposition.

The framework consolidates the practices of different investors we spoke to but also advocates an evaluation process that moves beyond Do No Harm toward Best Interests while incorporating elements of both. It is structured so that questions are organized based on the type of transaction being contemplated: a minority or majority stake being sold, as part of a consortium of shareholders, or by a single investor.

The framework is not designed to be – nor could it be – one-size-fits-all: Each exit is dependent on the investee’s mission and the context in which it operates, as well as the seller’s own objectives. The framework should be thought of as providing a rubric that each seller can expand upon themselves. It can be thought of as a three-stage process:
<ol>
 	<li>Are there exclusionary factors that mean the potential buyer is manifestly unsuitable; and, if not, is there any reason to believe that regulatory approval for the purchase would be difficult or unlikely?</li>
 	<li>If not, is the initial, indicative financial offer within a predefined range that is acceptable to the seller(s) based on the overall double-bottom line objectives of the fund?</li>
 	<li>If so, how does the proposed buyer, and its strategic objectives for the MFI, align with the social mission and the other best interests of the MFI?</li>
</ol>
We believe that the responsibility of finding the right buyer lies very much with those doing the selling. And if the sale means handing over control – a majority stake – this creates an even greater burden. As we argue in the conclusion, “A buyer selection practice which gives primacy to the financial offer and considers social mission and strategic value to the investee – the investee’s best interests – only to reject egregiously unsuitable buyers, fails to keep in mind that the best interests of the MFI and its clients are, for the investors who put funds into the MIV, arguably the primary reason for investing in the financial inclusion sector in the first place.”

We hope this framework will serve as a resource for investors embarking on an equity sale. We hope it could also: help investors to brief external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.); assist new categories of impact investors that have little experience in exits; and serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from wasting time on a futile due diligence process. We hope too that it will inspire further work on an issue which, as equity sales continue to grow, will only increase in importance.

<a href="https://nextbillion.net/authors/daniel-rozas/" target="_blank" rel="noopener">Daniel Rozas</a> and <a href="https://nextbillion.net/authors/sam-mendelson/" target="_blank" rel="noopener">Sam Mendelson</a> are co-authors of the joint NpM/e-MFP/FIEC research project on buyer selection in responsible exits.

Photos courtesy of <a href="https://www.pexels.com/photo/architecture-door-entrance-exit-277552/" target="_blank" rel="noopener">Pexels</a> and Braden Hopkins via <a href="https://unsplash.com/photos/4WJcte5CByc" target="_blank" rel="noopener">Unsplash</a> 

Have you read?

<a href="https://cfi-blog.org/2018/03/12/solving-the-puzzle-of-responsible-exits-in-impact-investing/">Solving the Puzzle of Responsible Exits in Impact Investments</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What’s “Responsible” about Impact Investing Exits?</a>

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

&nbsp;

&nbsp;

Caveat Venditor: A New Model for Buyer Selection in Responsible Microfinance Equity Exits

Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” The paper is co-authored by Daniel Rozas and Sam Mendelson and is part of a joint research project on buyer selection in responsible exits of <a href="http://www.inclusivefinanceplatform.nl/home">NpM, Netherlands Platform for Inclusive Finance</a>, along with the Financial Inclusion Equity Council (FIEC) and the <a href="http://www.e-mfp.eu/">European Microfinance Platform</a> (e-MFP). Caveat Venditor focuses on one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients.

With the growing maturity of the microfinance industry, a question that has come into sharper focus is how social investors committed to advancing responsible finance practices should “exit responsibly” from the microfinance institutions (MFIs) – and, increasingly, the broader category of financial service providers (FSPs) and other companies working in financial inclusion – in which they have invested.

Leveraging an industry consultation process, Daniel and Sam have consolidated investors’ own emerging principles and procedures in assessing potential buyers, and used the findings to produce a Conceptual Framework for Buyer Selection in financial inclusion equity exits. This framework serves as a resource for investors embarking on an equity sale, providing them with a concrete, industry-recognized framework to evaluate an exit. Additionally, it can:
<ul>
 	<li>Guide investor discussions with external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.);</li>
 	<li>Assist new categories of impact investors that have little experience in exits; and</li>
 	<li>Serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from spending time on a futile due diligence process.</li>
</ul>
During the course of the research, a majority practice and opinion emerged (what we call the First, Do No Harm consensus), alongside dissenting voices that argue for an inversion (what we call, continuing the medical analogy, the Best Interests approach) of some of the processes and presumptions of this majority perspective. As a result, we have moved beyond just reporting what existing industry practice is, to incorporate in the output of this paper - the Conceptual Framework for Buyer Section – not only what is commonplace, but also what industry practice could – and perhaps should – look like.

&nbsp;

&nbsp;

Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits

Impact investors are motivated by two primary objectives: to generate a financial return and to create positive social or environmental impact. But how do they balance these dual goals throughout the investment process, and specifically at exit? It’s no easy feat.

Investors must consider what happens to impact when they exit an investment. For example, if a company received critical capital and resources from an investor, will it still be equipped to succeed and continue its mission when that investor exits? What if an investor sells her shares to a more commercially-minded buyer who deprioritizes the company’s impactful or sustainable practices?

In financial inclusion investments, the possibility of mission drift after exit can have real implications for impact. For example, if a microfinance institution is acquired by a firm with little experience with underbanked customers, it could increase loan sizes beyond what clients are able to pay back, ultimately leading them into cycles of debt. Impact investors seek to mitigate such risks by exiting their investments responsibly.

A 2014 paper called <a href="http://www.cgap.org/sites/default/files/Forum-Art-of-the-Responsible-Exit-April-2014.pdf">The Art of the Responsible Exit in Microfinance Equity Sales</a>, by CFI and the Consultative Group to Assist the Poor (CGAP), explored the topic, outlining four decisions that microfinance equity investors can consider: i) the timing of their equity sale; (ii) buyer selection; (iii) governance and the use of shareholder agreements; and (iv) how to balance social and financial factors across multiple bids for their equity. Later this spring, the authors will publish a follow-on paper with guidance for all financial inclusion investors, beyond just those of microfinance institutions.

This year, the Global Impact Investing Network (GIIN) published <a href="https://thegiin.org/research/publication/responsible-exits">Lasting Impact: The Need for Responsible Exits</a>, a study that draws insights across sectors and asset classes that can be applied to financial inclusion investments. To produce this report, my colleagues and I interviewed over 30 leading practitioners, and found that investors plan for a responsible exit even before the investment is made. They lay the foundations for long-term impact throughout all stages of the investment process, from due diligence and capital structuring to exit.

During pre-investment due diligence, investors seek out companies or projects that present few risks to mission drift down the line – such as those with inherently impactful business models and those whose founders have a strong commitment to impact. They note that companies with impact ‘baked in’ to their business models face few tradeoffs between financial and impact objectives, so are unlikely to deviate from their mission. The question of ‘whom to exit to’ is key – echoed in CGAP and CFI’s paper – and investors note that they consider this during due-diligence, looking at likely exit options, which often depend on companies’ plans for growth. Annie Roberts of Open Capital Advisors noted that “if the planned exit for a given business is to a large strategic [buyer] that might not share the same impact motives, the investor takes this into account when deciding whether to make the investment in the first place.” CGAP and CFI’s paper also notes that investors typically “plan their exits before they enter”.

Once ready to deploy capital, investors can structure investments to help the company grow sustainably, without jeopardizing impact. Return expectations and structuring aspects like repayment timelines or <a href="https://www.investopedia.com/terms/h/holdingperiod.asp">holding periods</a> and ownership stake in the company can all form part of a responsible exit strategy. For example, while equity investments can allow for more active involvement, they also tend to have relatively short time horizons (a 3-4 year holding period for a typical 10-year fund, for example) and growth expectations that could lead companies to prioritize expansion over sustainable practices. Debt investments, on the other hand, can be structured with flexible repayment schedules that avoid the pressure for rapid growth. Tying some portion of payments to revenue can free up needed cash for companies with variable cashflows, while also enabling investors to participate in a company’s success.

Investors can also use shareholder agreements and other structuring documents to solidify the company’s mission. Grassroots Capital’s concept note on “<a href="https://www.grassrootscap.com/wp-content/uploads/2014/02/Hardwire_Jan2014.pdf">’Hardwiring’ Social Mission in MFIs</a>” shows how <a href="https://www.investopedia.com/terms/a/anti-dilutionprovision.asp">anti-dilution clauses</a>, <a href="https://www.investopedia.com/terms/d/dualclassstock.asp">dual share structures</a>, and <a href="https://www.investopedia.com/terms/g/goldenshare.asp">golden shares</a> can help preserve a company’s integrity or keep key decisions in the hands of mission-aligned founders. CGAP and CFI’s paper echoes this, with the example of Aavishkaar-Goodwell’s exit from Equitas. Equitas had a majority independent board (which could reject share sales resulting in over 24 percent ownership), shareholder agreements that set a cap on ROE, and commitments to donate 5 percent of its profits to charity. These governance clauses helped create a “self-selecting pool of potential investors”.

During investment, investors can instill positive practices and corporate governance policies that will last through changes in ownership. For example, investors can work with company management to improve governance policies like adhering to <a href="http://www.cerise-spi4.org/">SPI4 standards</a>, which assess an institution’s social performance, in the hopes that sound practices will continue through changes in ownership.

The exit itself, of course, is also key. Whether exiting through a strategic sale, to a financial buyer, or through an IPO, investors can seek to exit at a time when the company is at a stable stage in its growth, and can benefit from another investor’s capital or resources. For example, the GIIN’s paper profiles LeapFrog Investments, which felt it was time to exit its investment in a Ghanaian life insurance company called Express Life once it saw the company growing steadily and in need of growth capital beyond what LeapFrog could provide.

When it comes time to exit, though, how do investors know if they’re selling to a follow-on investor that might later take the company in a different direction? CFI and CGAP’s paper highlights the importance of buyer selection, and the GIIN report shows how investors identify buyers that are aligned with the company’s business model or mission. For example, LeapFrog seeks buyers that recognize the commercial value in serving low-income consumers, as well as the impact inherent in these business models. It sold its stake in Express Life to Prudential Plc, which sought to establish a presence in Africa and understood both the value proposition and the impact created by providing critical financial services to low-income consumers.

This research can guide investors – those focused on financial inclusion and those targeting other themes – in sourcing, structuring, managing, and exiting investments to optimize for long-term positive outcomes. As the industry continues to mature, investors will further develop strategies for responsible investments and responsible exits that result in lasting impact.

Have you read?

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2018/03/06/impact-investing-trends-in-2018/">Impact Investing Trends in 2018</a>

<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing’s Unproductive Self-Analysis</a>

&nbsp;

&nbsp;

Solving the Puzzle of Responsible Exits in Impact Investing

&gt; Posted by Elissa McCarter-LaBorde, CEO, Vitas Group

<a href="https://www.flickr.com/photos/126278138@N03/17096832777/"><img class="alignright wp-image-23408" style="margin-top: 0;border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/04/17096832777_b86f614a70_z1.jpg" alt="" width="315" height="178" /></a>Alex Silva and Jeffrey Riecke’s recent blog post entitled “<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What’s 'Responsible' about Impact Investing Exits?</a>” hits squarely on the head a critical issue facing our industry. But it doesn’t go far enough. They ask “What if responsible investors sell their stake to an investor that doesn’t place priority on the social mission?” They argue for investors to take a “pragmatic” course and find “a buyer in the middle,” meaning something in between the “high-priced but questionable offer” and the “capital-starved social investors.” This left me wondering, who exactly is in the middle?

In the past, the NGO founders of what are today profitable microfinance banks were expected to be the keepers of a social mission, if not through ownership then through some form of continuing sponsorship or governance role. Compared to five years ago, today we see term sheets that force NGO shareholders out in the name of successful exits. In fact, even the large open-ended funds, presumably more socially-responsible leaning ones, and the development finance institutions (DFIs) that technically don’t require tighter exits of 5-7 years, are coming with term sheets that require a put option (an option contract giving the owner the right to sell assets at an agreed price) in 5-7 years back to the NGO founder or the company, or that include a drag-along right that forces a majority sale to a future “strategic buyer.” In other words, if the minority investor finds a strategic buyer who wishes to buy a majority stake or to acquire the whole company, the investor can drag other shares along to constitute a majority sale.

This seems to be the outcome of lessons that exits are still incredibly difficult in our industry. With IPOs hard to count on, the equally opaque and far off “strategic buyer” seems the other plausible solution. But just who is this strategic buyer? It is not another microfinance investment vehicle (MIV), DFI, or other player on the spectrum of social responsibility. Few of these want to buy secondary shares. A strategic buyer is a commercial bank, a telecommunications company, a consumer finance company, or other commercial entity that will want to get in on the base of the pyramid market.  Hopefully the managers of these businesses might have sympathetic feelings about the business and appreciate that it is social because it reaches lower-income customers, but at the end of the day, social is not in their lexicon.

Is this a bad thing? I agree with Silva and Riecke that if lower-income customers are served well, then it shouldn’t matter. But in reality, it does often matter because there are tradeoffs. We in the financial inclusion industry are working very hard to demonstrate returns and prove that exits are possible in order to build an impact investing community of buyers and sellers. But it can be at the expense of the investees – the financial service providers. We need more of the focus to be on what these financial service providers need and how to tailor the right kind of capital to fit those needs. Where are the (affordable) investment bankers who can identify buyers and structure appropriate capital at the right stage to match those needs?  Managing a double bottom line is never an even balance when shareholders are sitting at different stages of investment. There are always trade-offs. Riskier market segments, harder to reach geographies, capacity building or expansion that is good for the investee and its customer base, but will reduce book value and returns in the short run, are often at the losing end of those trade-offs. They are casualties when the dominant need is to push the price up.

Who is responsible for the responsible exit? We need shareholders to act responsibly together, to sequence investments in a way that helps the business pursue its goals and leads to the success of the business, not just the success of the impact fund. The fund managers who often sit on boards are not in the right place to do this. There are too many pressures to demonstrate a return for the next fund they are raising. Should the onus be on the anchor investors, many of whom are still DFIs and large institutional investors? The alternative is that “pragmatic” decisions taken by shareholders could force a sale to a commercial buyer when the institution might not be ready or not find such a sale in its best interest at that point in time.

In full disclosure, I am not opposed to commercial investors and ironically, I am finding the purely commercial investors easier to negotiate with, than the socially responsible ones who in theory are “like-minded.”

Vitas Group, established by Global Communities as a for-profit vehicle to advance its work in financial inclusion, operates a network of financial services companies that lend to small enterprises across the Middle East. Over the last decade, Vitas companies have disbursed more than $1.6 billion to 614,000 customers with an annual default rate below one percent in Iraq, Palestine, Lebanon, and Jordan. Vitas employs more than 1,500 young professional staff and has sustained more than 214,000 jobs by lending to small business owners. Despite the volatility that has defined this region, even before ISIS or the Syria conflict emerged, Vitas has continued to earn double digit returns and has been a solid investment for its shareholders, illustrated by the fact that this year Vitas will close its first transactions with two purely commercial, private equity investors in the region.

To my point above, Vitas could not have arrived at this point without the right kind of capital at the right time. With new commercial partners and technological innovations coming into our industry, we have an even greater opportunity to achieve that larger goal of financial inclusion for every citizen. But that makes it all the more important for the development-focused founders, sponsors, investors, and other shareholders to govern well and to work together responsibly to shepherd the process.

<a href="http://www.vitasgroup.com/summary/leadership/#">Elissa McCarter-LaBorde</a> is Chief Executive Officer of Vitas Group and Vice President of Development Finance for Global Communities, where over the last 12 years she has built the technical department that manages Global Communities’ microfinance, SME, and housing finance operations. Ms. LaBorde has 18 years' experience as a microfinance practitioner.

Image credit: <a href="https://www.flickr.com/photos/126278138@N03/17096832777/">Pictures of Money</a>

Have you read?

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What's "Responsible" about Impact Investing Exits?</a>

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

Who's “Responsible” for Responsible Impact Investing Exits?

&gt; Posted by Alex Silva, Executive Director, Calmeadow, and Jeffrey Riecke, Senior Communications Specialist, CFI

<img class="alignright wp-image-23248" style="border: .5px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/03/keys-1317391_1920.jpg" alt="" width="245" height="228" />Impact investors, social investors, responsible investors…regardless of name, they claim to serve the greater good. In the world of financial inclusion, impact investors are supporting the development of financial markets that have inadequately served the base of the economic pyramid.

What happens when social investors exit from their financial inclusion investments?

Some exits are non-controversial, but what if responsible investors sell their stake to an investor that doesn’t place priority on the social mission? The risk of mission drift or abandonment is real, and responsible investors must consider it as they make their exit decisions. With financial inclusion sector trends suggesting that impact investing exits are going to become more frequent, it’s worth examining the topic in greater detail.
<h3>Investors exit for many reasons </h3>
It’s important, especially for critics of impact investors, to recognize that a decision to exit may arise from any number of factors, including factors internal to the investor.
<ul>
 	<li>When a market has been proven viable and starts to attract fully-commercial capital, investors might “declare victory and go home”. Many financial inclusion investors are doing just this.</li>
 	<li>In other cases, an investor’s strategy might change. Perhaps an investor decides to focus on a different region or sector.</li>
 	<li>The investor is thirsty for money, for any number of reasons. Perhaps it is experiencing internal financial challenges or increased capital requirements, or it has a higher priority investment opportunity to pursue.</li>
 	<li>Markets can become risky. The enabling environment of particular countries can change. For instance, isolationist policies might spur opposition to foreign-owned businesses.</li>
</ul>
<h3>Exiting responsibly </h3>
Responsible exits support the preservation of the investee’s social mission, and they take place at a time that’s best for the industry.

A good lens for considering whether an exit is responsible is the reason for the investment in the first place. If the investment was initially socially motivated, then investors should not simply be motivated by financial returns when they exit. Financial return (the price offered) is important, but it shouldn’t be the only criteria. For example:

The Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) has been a long-time investor in microfinance organizations. Generally, they’ve been diligent about every stage of investing, including thinking about their exit strategies up front, when they invest. They have normally exited to similarly socially-minded organizations. This enables continuity in the investee organizations for the treatment of clients, and also continuity for staff. When the MIF sold its investment in CALPIA, a microfinance institution in El Salvador, it sold to responsible buyers committed to financial inclusion.
<h3>Exiting irresponsibly</h3>
Let’s contrast this with not-so-responsible exits where the values or missions of the original investor and the new buyer are not matched. If an investor sells its stake in a microfinance institution to an entity that has no experience or demonstrated interest in financial inclusion, this presents the heightened possibility that the buyer will not continue the practice. It may raise prices, reduce service quality, or move upmarket, among other things. Not-so-responsible-exiting can entail selling investment stakes to the highest bidder across a variety of stakeholder types. We have seen instances of investments sold to entities like consumer lenders with reputations for profit-first practices. We have also seen instances of sales to governments, with the result that the newly government-owned institution damages a market by offering highly-subsidized interest rates, making it difficult for other institutions to compete on a level playing field.
<h3>When investors hold investments too long</h3>
We’ve also seen instances where impact investors hold investments in markets where local commercial banks or bona-fide investors are interested. In these cases the impact investors’ money would be better used elsewhere. Why don’t these investors sell?

Often, they simply do not want to reduce their portfolios. For example, many development finance institutions (DFIs) and microfinance investment vehicles (MIVs) are measured and rewarded by the size of their portfolios. It’s not necessarily about the return (financial or social). This is especially true if the investors are paid a percentage fee based on how much they have invested, which creates a perverse incentive against selling assets.

In Colombia, where commercial banks are increasingly interested in microfinance, an NGO owned a controlling stake in an MFI. A potential buyer bid to buy the entire bank from the NGO and merge it with the bank’s operations. Onlookers might have speculated that this presented a risk of mission drift. Maybe the buyer just wanted the banking license. Maybe it just wanted the savings deposits. Both concerns were easily set aside: the buyer was already a licensed commercial bank and the NGO-owned bank had few depositors. In fact, the commercial bank was positively interested in entering the microfinance market and serving Colombian micro-entrepreneurs. For its part, the commercial bank had a lower cost of funding and better IT systems. It had the resources to make the MFI and its services better than the NGO could. Accordingly, the NGO could have declared victory, taken its money, and done other things in Colombia, like support microfinance in rural areas or advance public health. Unfortunately, the NGO was not able to see the benefits of the possible transaction and opted not to sell.
<h3>Impact investing trends</h3>
The financial inclusion industry is evolving. There is an increasing diversity of inclusive finance providers and investors, from commercial banks to fintech companies. At the same time, for many of the impact investing vehicles created in the last decade, their investment horizons are coming to a close. We can expect to see more exits and more variety in those exits. Until now, most of the inclusive finance impact investment exits have involved DFIs or microfinance networks selling to MIVs or vice versa. Suddenly, other types of players are coming in, including those with little history with microfinance, and this may rattle many participants in the industry. This trend will increase, and there is nothing inherently wrong with that. We might even see an influx of players who are better able to eliminate financial exclusion! What is potentially wrong would be misplaced motivation. “The fundamental things apply”: if you exit to a buyer that has a questionable history, you are not acting responsibly.
<h3>Greater industry action</h3>
More attention needs to be brought to this subject. Organizations like the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council (FIEC)</a> work continuously to facilitate discussion in this space and move the industry forward. A few years ago CFI and CGAP produced a paper, <a href="http://www.cgap.org/publications/art-responsible-exit-microfinance-equity-sales">The Art of the Responsible Exit in Microfinance Equity Sales</a>. We’re seeing groups like the European Microfinance Platform regularly convening conversations at seminars and events. These are important contributions, but much more attention needs to be paid among investors and industry players. Surely some exiting investors are simply happy that someone is buying, and they aren’t necessarily thinking about the consequences.

And for those who are thinking about the consequences and considering the best path forward, pragmatism is key. Investors have responsibilities to their own funders, both financial responsibilities and responsibilities to uphold any social mission that attracted those funders. They should not sell to the high-priced but questionable offer, and neither should they opt for capital-starved social investors. Perhaps the pragmatic and social course is to work harder and find a buyer “in the middle”.

Have you read?

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2016/01/27/the-impact-investing-landscape-in-west-africa/">The Impact Investing Landscape in West Africa</a>

What’s “Responsible” about Impact Investing Exits?

&gt; Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

<a href="http://cfi-blog.org/category/investing-in-inclusive-finance/"><img class="alignright" style="border:0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/02/untitled2.jpg" alt="" width="310" height="54" /></a>

The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/investing-in-inclusive-finance" target="_blank">Investing in Inclusive Finance</a> program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

You may have noticed an uptick in headlines over the past few months announcing the selling of microfinance equity shares. Here are a few examples:  <a href="http://www.microcapital.org/microcapital-brief-incofin-investment-managements-rural-impulse-fund-rif-acquires-15-equity-stake-in-financiera-el-comercio-fielco-from-accion-gateway-fund/">Accion sells 15 percent stake in Paraguay’s El Comercio to Incofin’s Rural Impulse Fund</a>; <a href="http://www.microcapital.org/microcapital-brief-creditcorps-financiera-edyficar-of-peru-to-acquire-61-stake-in-mibanco-for-179m/">Grupo ACP sells its 60.68 percent stake in Peru’s MiBanco to Edyficar</a>; <a href="http://www.microfinancegateway.org/gm/document-1.9.63841/Press%20release%20Triodos%20Investment%20Management%20completes%20sale%20of%20equity%20stake%20in%20ACLEDA%20Bank%20Plc%207%20Feb%202014.pdf">Triodos sells stake in Cambodia’s ACLEDA Bank to ORIX Corporation</a>.

Expect to see more such headlines, as the number of exits from microfinance equity investments is anticipated to accelerate in the next couple of years as a result of a combination of different factors:
<ol>
	<li>Equity funds are maturing. Many funds were created around the same time and while some have no official time horizon, even patient capital reaches a point when it is time to consider moving on.</li>
	<li>Microfinance institutions (MFIs) are also maturing. Thanks to the patient capital and expertise of many initial microfinance investors, some MFIs are now so large and sophisticated that they need new investors with deeper pockets and different expertise to further their growth and development.</li>
	<li>Social investors are moving into new frontiers. Some social investors are reevaluating where their equity funding and participation can have the biggest impact, for example by moving into more rural or poorer countries. In a number of countries, regulatory environments are becoming friendlier to foreign microfinance investors now that they have a more proven track record.</li>
</ol>
Given that many social investors are seeking to pass the baton, what does it mean to exit an investment responsibly?

The freshly released paper, <a href="http://www.cgap.org/publications/art-responsible-exit-microfinance-equity-sales">The Art of the Responsible Exit in Microfinance Equity Sales</a>, dissects exactly this question. The paper, a joint effort of the Center for Financial Inclusion at Accion (CFI) and the Consultative Group to Assist the Poor (CGAP), shares the thoughts and experiences of 50 investors and industry stakeholders on the topic of exiting an investment in a “responsible” manner.

What did we uncover?



<a href="http://www.cgap.org/sites/default/files/Forum-Art-of-the-Responsible-Exit-April-2014.pdf"><img class="alignright wp-image-14730" style="border:0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/04/untitled.png" alt="" width="270" height="348" /></a>At first, there were more questions than answers. What does “responsible” even mean? Is it responsible to sell to a buyer with no social mission? At first blush, most social investors would prefer that their successors maintain the commitment to mission. But what if a purely commercial buyer pays a high price, allowing the seller to redeploy those funds into regions and institutions where they are more needed? And what if the proposed buyer has the exact expertise and resources needed to help the institution grow to the next level, reaching more clients? Is this sale good for the institution, the industry, management, and the other investors? There are lots of shareholders and factors to consider, and often, many shades of grey and tradeoffs to be made.

Several themes emerged from the research. For instance, when considering a buyer, almost all social investors insist on a commitment to responsible behavior and most prefer to continue the social mission of the MFI. Potential buyers are generally dismissed if they don’t have a “baseline of socialness” (e.g. endorsement of the Smart Campaign and willingness to implement the client protection principles). There are also ways to ensure the continuation of the social mission. Exiting investors can bake language into the shareholders agreement to protect the mission and ensure that all future investors also have to sign that agreement. These and other mechanisms discussed in the paper were employed by the majority of the investors interviewed to make sure the social mission would live on at the MFI.

The importance of process, timing, and communication also emerged as key themes in the paper. Many interviewees strongly stressed the necessity of thinking about, planning, and communicating your intended exit and timeline before even making an initial investment. On the other side of the deal, the actual logistics of exiting often prove time consuming in terms of navigating legal systems and regulatory bodies, and exits can become especially challenging to execute when factoring in the rights of other shareholders.

Another theme explored in <a href="http://www.cgap.org/publications/art-responsible-exit-microfinance-equity-sales">The Art of the Responsible Exit in Microfinance Equity Sales</a> is the different expectations of private microfinance investment intermediaries (MIIs) versus development finance institutions (DFIs) when exiting an investment. DFIs are publicly funded with explicit development mandates. Given their public funding and mandate to provide patient capital, DFIs have additional responsibilities to the larger industry in terms of ensuring market development. DFIs are meant to “crowd in” private investments, and when, and how a DFI exits can send important signals to local or more mainstream investors and indeed to the entire industry.

This paper is not intended to be overly prescriptive. Many of the issues we raise and the cases we present are meant to be launching points for further discussion. As the number of exits increases, we believe the topic of “what it means to exit responsibly” will warrant more examination – and we hope it will be explored further.

Danielle Piskadlo is a Manager in the Investing in Inclusive Finance program area at the Center for Financial Inclusion at Accion (CFI). 

Have you read?

<a href="http://cfi-blog.org/2014/02/05/the-art-of-the-responsible-exit-in-microfinance-equity-sales/" target="_blank">The Art of the Responsible Exit in Microfinance Equity Sales</a>

<a href="http://cfi-blog.org/2014/02/04/microfinance-equity-investing-the-early-days-of-cmef/" target="_blank">Microfinance Equity Investing: The Early Days of CMEF</a>

<a href="http://cfi-blog.org/2014/02/10/microfinance-equity-investing-different-context-similar-issues/" target="_blank">Microfinance Equity Investing: Different Context, Similar Issues</a>

Passing the Baton – but to Whom? Considerations for Investors

As the microfinance industry matures, a question that has come into sharper focus is how social investors committed to advancing responsible finance practices should “exit responsibly” from the microfinance institutions (MFIs) in which they have invested over the years. As they prepare to sell their stakes, what options do development-minded investors have to help ensure responsible behavior by their partner MFI into the future and healthy development of the broader market?

In this paper the Center for Financial Inclusion at Accion (CFI) and the Consultative Group to Assist the Poor (CGAP) seek to spark discussion among the stakeholders working to advance financial inclusion and in particular the investor community that will result in greater clarity around the goal of responsible exits and the policies and practices that would support it.

The Art of the Responsible Exit in Microfinance Equity Sales

The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/investing-in-inclusive-finance" target="_blank" rel="noopener">Investing in Inclusive Finance</a> program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

When you think about responsible investing, what comes to mind? Finding investment prospects that can deliver social returns? Perhaps diligent monitoring, with an eye to effective governance? How about when you sell an investment? How can investors remain committed to balanced social and financial goals when passing the baton to someone else?

This last question is the focus of a joint project by the Center for Financial Inclusion and CGAP. With several microfinance equity funds approaching maturity, the issue of equity sales is becoming more relevant, and as part of the project, the team has been interviewing many equity investors to understand how they perceive the question of what, exactly, is a responsible exit? A paper detailing the findings of these interviews, The Art of the Responsible Exit in Microfinance Equity Sales, will be released in the coming weeks.

In the course of these interviews, many respondents used the analogy of children growing up. As early-stage or founding investors, they reach a certain point where they have fulfilled their "parental" mission and are no longer best-positioned to provide the MFI what it needs, be it capital, expertise, or market access. From the investor's perspective, the analogy works. But selling an MFI is less an act of entrusting your child's future to his or her own good sense, along with whatever wisdom you've been able to impart – you are handing the MFI over to somebody else.

Indeed, the better analogy might be that of an arranged marriage: you hire a matchmaker (M&amp;A specialist) to help find a suitor (buyer); you meet with the suitor to find out who he is and what he has done in the past (due diligence); maybe if you're a responsible parent (investor), you ask your daughter (MFI management) for her opinion. All along, you are nagged by one important question – is this a suitable match for my daughter?

Unsurprisingly, buyer selection is a major part of social investors' focus during the process and is seen as the most important way to assure continued attention to the double bottom line. However, investors have a few additional options at their disposal to insure that buyers will stick to their promises and will not lead the MFI away from its primary mission. The most common among these is simply selling a minority stake, relying on other like-minded investors to provide continuity of governance. In one case, a seller included one year employment contracts for key MFI management as part of the sale agreement, thus assuring at least temporary continuity in MFI operations. Several investors incorporated specific commitments to the MFI's social mission and to client protection principles in the shareholder agreement, thus binding the buyer to some degree. Yet another investor was seeking to structure a minority stake with veto power over key institutional decisions, as a means of retaining post-sale control.

Each of these is an interesting exercise in insuring at least some level of continuity or control, even if the suitor turns out to be a dud. However, one institution figured out a way to bypass the process altogether. From the start, it was built on an unusual evergreen governance structure that assured that this commercial enterprise would stick to its social mission. Its initial charter insured that no single investor would have a controlling stake, and gave its board – composed of majority independent directors – veto power over any acquisition that would give a single investor a controlling stake. In effect, the structure gives a purchasing investor a share of the company's assets and earnings, while leaving governance largely outside investor hands. And thus far, this MFI has been highly successful. In effect, the institution rendered the arranged marriage – or any marriage – unnecessary, by choosing to remain single and independent.

Which MFI is this, and how exactly does its governance structure function? And what are the other relevant lessons to investors seeking to sell their equity responsibly? Stay tuned for The Art of the Responsible Exit in Microfinance Equity Sales.

Have you read?

<a href="http://cfi-blog.org/2013/09/23/a-204-million-leap-for-financial-inclusion/" target="_blank" rel="noopener">A $204 Million Leap for Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/03/29/six-to-dos-now-for-responsible-investors/" target="_blank" rel="noopener">Six To-Dos Now for Responsible Investors</a>

<a href="http://cfi-blog.org/2013/07/23/a-journey-to-understanding-risk-as-a-new-board-director-in-governing-banks-mfi-edition/" target="_blank" rel="noopener">A Journey to Understanding Risk as a New Board Director in "Governing Banks: MFI Edition"</a>

&nbsp;

Mayada  El-Zoghbi

Managing Director, CFI

Njord Andrewes

Deputy Chief Investment Officer

Valérie Kindt

Rachel Morpeth

Nancy Widjaja

India

South Asia

Haiti

Latin America and The Caribbean

Mexico

Banks

Credit

Financial Service Providers

Impact Investing

Microfinance

MSME/SME Finance

Responsible Exit

Challenges and Crises

Enabling Environment

Financial Health

Microfinance Institutions

Resilience

Housing Finance

Responsible Investing

Social Impact Metrics

Credit/Debit Cards

Entrepreneurs of MSMEs

Fintechs

Education Finance

Article

Press Release

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

While microfinance was taking off in rural India in the early 2000s, micro-entrepreneurs in cities still had limited access to the financial tools they needed to manage their businesses and pursue opportunities. The group loans for women that were popular in rural areas had not seen much traction in urban centers.

Veena Mankar decided to get to the bottom of this problem. After a lifelong career in international banking, she decided to focus on the poor and spend time visiting with micro-entrepreneurs in the urban neighborhoods in Mumbai. Through these visits, Veena saw that, while group products worked in rural settings where socioeconomic conditions were generally homogeneous, they fell short for people in cities, where the demographics are more diverse. Armed with this knowledge, Veena started Swadhaar FinAccess (SFA) as a nonprofit offering microcredit in urban areas.

When looking for partners to embark on this journey, Veena found Accion. While others insisted that offering individual loans to this segment would not be feasible, we saw the value in Veena’s plan and offered our encouragement. Veena soon realized that Accion’s expertise made us the perfect partner to help her enact her vision.

“Swadhaar always operated under three key pillars: the client, the employee, and the investors,” says Abhishek Agrawal, Accion’s Chief Regional Officer in India and former CFO of Swadhaar.  Veena’s client-focused vision meant not relying on “cookie-cutter” products, which made growing fast a challenge. Veena was also determined to form a team of highly motivated individuals, with competitive salaries, who were committed to Swadhaar’s mission and open to innovation. Many microfinance institutions at the time had their loan officers working six or even seven days a week, often living in or near the branch. She prioritized work-life balance and maintained a 5-day work week. Finding the right talent was hard, and the first year and a half involved a lot of turnover. Accion helped ease this process by sending some of our senior management staff, who could run with Veena’s vision, to work alongside the Swadhaar team.

The industry was skeptical of Swadhaar’s plan to launch new microfinance products and “spoil” employees with benefits. But still Veena persisted. “I started Swadhaar with the aim that after four or five years, it would have a big impact on customers, and it would have a big impact on the way the employees in the underserved sector are treated,” Veena says.

The biggest challenge of all was translating Veena’s research and vision into a viable product. In 2006, Swadhaar experimented with a hybrid of an individual and a joint loan for small groups of just three to four people. However, as it often happens with new business ventures, the first iterations were challenging. This type of product hadn’t been done before, and testing and adjusting it was a complex process, made even more complicated by the ongoing hunt for the right staff.

As Swadhaar expanded its offering, it also increased its territory. Accion sent more of our staff to work with Swadhaar as it grew beyond Mumbai, to make back-end operations more efficient and launch an individual loan product to serve the “missing middle,” micro and small merchants that needed access to credit. In 2008, when Swadhaar converted from a nonprofit to a microfinance institution called <a href="http://www.swadhaar.com/">Swadhaar FinServe</a>, Accion took a stake in the company.

Two years of significant expansion proceeded for Swadhaar, and the future seemed to be brighter. Then, in late 2010, the <a href="https://www.cgap.org/sites/default/files/CGAP-Focus-Note-Andhra-Pradesh-2010-Global-Implications-of-the-Crisis-in-Indian-Microfinance-Nov-2010.pdf">Andhra Pradesh crisis</a> hit. Ultimately, new regulations, which included interest rate caps, meant Swadhaar could no longer afford to offer its individual loan product and had difficulties raising the funds required for on-lending.

Accion supported Swadhaar with a standby guarantee to continue the flow of funding and sent Abhishek Agrawal to be seconded as Swadhaar’s CFO. Mr. Agrawal led an initiative to partner with <a href="https://www.rblbank.com/">RBL</a> Bank Limited to expand Swadhaar’s portfolio. In 2014, Swadhaar became a business correspondent exclusively for RBL Bank, sourcing and servicing group loans for the bank. With RBL Bank, Swadhaar’s clients can now access a broader array of products, including savings. It’s a win-win relationship, and Veena’s vision became a reality through this strong partnership.

“What I enjoyed the most about working with Accion is having a joint vision. Accion and I had a great clarity of what we wanted to do together. I am proud to say that our mission in Swadhaar has not changed since we started. We changed our product, we changed the way we implement it, we changed the way our operations are run, but we never had to change our mission. Accion had the same vision of bringing financial inclusion to underserved communities, the same vision of customer protection and customer service.” 

– Veena Mankar, Swadhaar Founder &amp; Chairperson 

Despite being unable to offer individual loans, Swadhaar did not lose its vision of bringing underserved merchants access to credit. An opportunity arose when RBL Bank agreed to extend their partnership with Swadhaar to individual loans as well. While RBL Bank already successfully served micro and small entrepreneurs with limited formal income documents, the Bank hoped to expand its customer base into new geographies and to clients with no formal documentation.

In 2016, Swadhaar, with RBL Bank, relaunched the individual lending product — a small business loan to serve the “missing middle.”  The introduction of these loans involved a three-way partnership between Swadhaar, Accion, and RBL Bank, to design a product built on Accion’s global expertise, Swadhaar and RBL Bank’s experience in India, and controls that met the Bank’s internal requirements.

Today, Swadhaar distributes two main products for RBL Bank: group loans, for women, and individual loans, for male and female small merchants.

From Veena’s initial vision, Swadhaar has grown to serve more than 750,000 clients in 17 states. We’re now exiting our investment in Swadhaar, proud of what we’ve accomplished while working together. By mid-2018, Swadhaar was wholly owned by RBL Bank. This <a href="https://www.accion.org/swadhaar-giving-all-indians-tools-to-build-better-life">acquisition demonstrates the impact and effectiveness of Accion’s model</a>. By staying true to Veena’s vision of bringing microfinance to unserved Indians, learning through trial and error, receiving support from Accion, and pursuing partnerships, Swadhaar has grown into a powerful force for financial inclusion. We’re confident that Swadhaar will continue to pursue Veena’s inclusive ideals and offer financial products that can transform the lives of low-income Indians.

Anjali Shahani contributed to this article.

Her dream seemed impossible, but she persisted — and 750,000 Indians benefited

When a devastating earthquake hit Haiti in 2010, it left large swaths of the country in ruin, affecting more than 3 million people. In a matter of minutes, many lost their homes, businesses and even their lives under the rubble. Our longtime portfolio partner <a href="https://www.sogebank.com/">Sogesol</a> didn’t hesitate to act: within five days, they had begun to implement their disaster recovery plan. At the time, the company served just over 11,000 clients, and it distributed emergency grants to 2,000 of its most vulnerable clients. With Accion’s support, Sogesol was able to refinance or reschedule 75 percent of its loan portfolio and help more than 8,000 Haitians restore their homes and small businesses.

<img class="alignleft wp-image-19000" src="https://content.accion.org/wp-content/uploads/2018/08/ENVIRONMENT_SOG_2015_63-683x1024.jpg" alt="Port-au-Prince" width="400" height="600" />Through the earthquake, droughts, and other challenges, we have been continuously impressed with Sogesol during our nearly two decades of partnership. There’s a reason it’s at the forefront of the commercial microfinance industry in Haiti. Sogesol is the micro, small, and medium enterprise (MSME) lending arm of SOGEBANK, one of the largest commercial banks in Haiti. It was created using the service company model, which does all the work of marketing, evaluating, approving, and collecting loans, but the loans themselves are on the books of the bank. This model seeks to draw from the best elements of bank involvement while avoiding its drawbacks. The institution has grown more than tenfold since its inception, and with 18 branches located across urban and rural areas, it has become the largest MSME lender in the country.

Accion’s Global Advisory Solutions team has played a significant role in Sogesol’s development. Bringing our considerable experience in microfinance for low-income entrepreneurs from Latin America, Accion guided the initial design of Sogesol’s financial products. We then worked alongside Sogesol’s management and staff implementing and fine-tuning their products, enhancing their credit processes with the integration of scoring tools, and building their risk management function. This strategic and operational support has helped the bank to grow from 3,546 clients in 2001 to more than 36,000 last year.

Initially, Sogesol focused exclusively on the urban areas of Haiti, but as the institution has become national in scope, one-third of its current clients are from the agricultural sector and in rural areas. The institution’s agricultural loan products are in high demand because they are adapted to the farmers’ seasonal cash flows and financing needs. Agriculture is crucial to Haiti’s food security and long-term resilience, so we’re proud that we’ve been able to work with Sogesol to expand coverage in this sector.

We will continue to give advisory support to Sogesol after selling our ownership stake in the institution to the management and other current shareholders. This strategic decision will leave governance in the capable hands of those who have been involved with the institution and its parent bank for years. With this guidance, Sogesol can continue its momentum as the leading small business and agricultural lender in Haiti.

[caption id="attachment_19001" align="aligncenter" width="600"]<img class="wp-image-19001 size-full" src="https://content.accion.org/wp-content/uploads/2018/08/2018-09-19-sogesol-dieula.jpg" alt="Dieula Basile fills a cupped with dried beans at her market stall" width="600" height="400" /> Funding from Sogesol helped Dieula Basile expand her inventory into dry goods and essentials that she can sell from her market stall year-round.[/caption]

Sogesol’s resilience has helped turn street vendors into shop owners. It has rebuilt livelihoods when natural disasters have destroyed homes, agricultural lands, and small businesses. Through everything, Sogesol has demonstrated that when done right, microfinance can thrive even in the most challenging circumstances.

Helping small businesses and farmers be more resilient in Haiti

In India, too many families lack the funding they need for housing. When we first partnered with Shubham in 2012, our goal was to make the dream of homeownership a reality for more low-income and financially underserved Indians. Five years later, the business has disbursed almost 30,000 loans to help people purchase or improve their homes.

Over the years, we’ve had the opportunity to get to know some of the people who have received these loans. We met Kusum Lata in northern India. Since she gets paid in cash for her job on an auto parts assembly line, she didn’t have an established financial record to help her get a loan. But Shubham’s holistic approach to evaluating borrowers allowed her to get the funds she needed to build a home for her family. We also got to know Hoshiyar Singh, who was able to develop his water pump manufacturing business without any outside financial help. Despite this achievement, home ownership still loomed out of his reach. A loan from Shubham allowed him to move out of his parents’ house and start a more independent life for him and his teenage children.

Like Kusum and Hoshiyar, too many people can’t come up with the funds to invest in the stability and autonomy that a home affords. Each of Shubham’s 30,000 loans has a story behind it — a growing family, an ambitious business owner, an independent, young professional — and the impact that having a home can make in these individuals’ lives is enormous.

Shubham has had a broader, indirect effect as well. When it began operations, there weren’t many options for low-income families in India to get financing for housing. Today, there are several similar services — including established financial providers — working to offer lower-income Indians the financing that they need. Supporting Shubham with the resources it needed to scale its efforts helped to catalyze a new product, and now more people will be able to afford homes.

We’re proud of what we’ve accomplished with Shubham. The time has come for Accion to exit the partnership, but we’re confident Shubham’s poised to continue making an impact. Shubham’s success drew the interest of Premji Invest, the largest single-family private equity firm in India. Premji is taking a significant ownership position in the company. With Premji Invest, Shubham will have the resources that it needs to expand and continue its work and create a housing market that works for India's financially underserved.

Like Accion Venture Lab’s successful exits from <a href="http://www.accion.org/accion-venture-lab-completes-first-successful-exit-in-india-based-lender-varthana-generating-financial-and-social-returns/">Varthana</a> and <a href="http://www.accion.org/accion-venture-lab-marks-second-successful-exit-driving-social-and-financial-impact-from-investment-in-clip/">Clip</a>, the sale of our stake in Shubham demonstrates that inclusive financial service providers can both advance social progress and generate positive financial returns. Those returns will help us continue developing new partnerships that in turn encourage further innovation and competition — they will help us provide families with opportunity all around the world.

Building better lives for Indian families

<div id="block-system-main" class="block block-system">
<div class="content">
<div class="content-node">

January 23, 2018 – Shubham Housing Development Finance Company, one of India’s leading housing finance companies providing housing loans and housing finance solutions to families with informal incomes, today announced that its series D round has received an investment of ~INR 305 crore through a combination of a primary and secondary sale which was led by marquee investor Premji Invest. It has also seen participation from its existing investors Helion Venture Partners &amp;amp; Elevar Equity.

This round has also seen the exit of Accion, whose investment is managed by Quona Capital, and Saama Capital. “We are privileged to be supported by such partners,” mentions CEO Sanjay Chaturvedi. Shubham along with private equity investors has also raised debt of more than INR 800 crore from a number domestic and international players. “With this, Shubham is poised to grow its loan book from INR 1000 crore to more than INR 6000 crore in the next 5 years,” says Chaturvedi.

As part of this deal, Rahul Garg, Partner, Premji Invest will join the Shubham board. “We fully support the promoters in their endeavour to provide affordable housing solutions for the marginalized sections of society. This is also aligned with the governments stated objective of “Housing for All”. Shubham has scaled up to be one of the leading affordable housing players by building fully automated underwriting and risk management practices, through their in-house sourcing mechanism which makes the company unique. Premji Invest will look to work with Shubham founders in building robust processes and systems to help scale the organisation to the next level,” remarks Rahul.

It was during their years with leading MNCs and domestic lending companies, that the founders Sanjay Chaturvedi and Ajay Oak, realised that a significant segment of customers from the urban working population were denied access to formal credit to purchase new dwelling units or to improve their existing ones since they could not evidence income on paper. Most mortgage companies were treating people with no formal income proof as being on negative lists and they were considered to be a huge risk.

Shubham was formed in 2011 with the goal of providing access to formal credit to this vast working class population, to help these urban lower-income families own a decent home. It has devised a unique process of an intensive budget analysis to recognize the real income and affordability of the household to underwrite loans, irrespective of the source of income.

Growth has been rapid as seen by the fact that they have disbursed loans to more than 26,000 households primarily been driven by increased demand for affordable housing across Tier II and Tier III cities where it has a strong presence across 12 states.

“With an ever expanding presence, we plan to scale up through a combination of leveraging proprietary internal &amp;amp; external technologies and multiple partnerships across categories to ensure superior customer delivery and be amongst the top housing finance players in this space,” remarks COO Ajay Oak.

</div>
</div>
</div>

Shubham Housing attracts investment led by marquee investor Premji Invest and Helion Venture Partners &amp; Elevar Equity

We, Accion Venture Lab, are by definition an impact investor. Our overarching goal is to invest in and provide support to seed-stage innovative fintech startups that increase access to, improve the quality of, or reduce the cost of financial services for underserved customer segments at scale. Grounded by this intention, our first and foremost step in screening for a prospective investment is to diligently assess the company’s potential in creating such impact. If our impact considerations are satisfied, we then move to carefully assessing the returns potential of the business. We only proceed with full-on due diligence if we see a strong promise of both impact and returns. Finding companies that we think can generate both is not a walk in the park, but we have yet to find ourselves in a situation where we need to consider trading one for the other.
We were therefore intrigued by Mara Bolis and Chris West’s take on the state of impact investing, <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/marginalized_returns" target="_blank" rel="noopener noreferrer">“Marginalized Returns”</a>, on SSIR that impact investing has been inundated by a false narrative that there is no tradeoff between social impact and financial returns. Our experience so far has given us a more nuanced perspective on this. We have seen that both social impact and financial gains can indeed go hand in hand. Last year we made two successful exits from <a class="markup--anchor markup--p-anchor" href="http://varthana.com/" target="_blank" rel="noopener noreferrer">Varthana</a> and <a class="markup--anchor markup--p-anchor" href="https://clip.mx/" target="_blank" rel="noopener noreferrer">Clip</a>, startups that not only scored on our financial impact goals but also delivered “market-rate” returns.
We share Bolis and West’s sentiment that while impact investing offers a spectrum of financial and social returns, too many impact investors have predefined expectations of financial return that are both too high and too short term. However, we believe that the question should not be whether setting certain financial returns target means that social returns need to be sacrificed.
Here are a couple of our thoughts:

<h3 class="graf graf--p">Impact investing is not one big monolith of an asset class</h3>
It’s worthwhile to note that impact investing is a nuanced space instead of a one-dimensional initiative. Stage, geography, sector, and other factors play a key role in determining potential impact and financial returns. The earlier the stage you invest, the riskier it is, and the longer the expected returns would be. Some sectors, such as education, are inherently more complex. Investing in a startup in South Sudan would present different economics than investing in one in Mexico. We commend Omidyar Network’s thoughtful <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/across_the_returns_continuum" target="_blank" rel="noopener noreferrer">Returns Continuum</a> framework that helps the breakaway the conversation from impact-returns tradeoffs.
We see a need for the industry to move away from a single umbrella to define impact investing and to develop and agree to a better framework to define the multi-dimensional nature of the space.

<h3 class="graf graf--p">Impact investing is still at a nascent stage — and so is the way we evaluate its performance</h3>
Being relatively nascent, impact funds have been raised based on GPs’ own narratives rather than vintage performance. Our northern star so far has been “market returns”, while many actually still struggle to define what that means or how that is applicable to them. How do we think about what is actually an “acceptable” rate of return for different types of investments — and how do allow for room for a figure to percolate up and down? How does the market hold funds accountable while there is there is little benchmark information?
The notion of a “subsidy”, a factor that also determines the rate of returns, is also a nuanced one. Our beyond capital support for our portfolio, ranging from bespoke strategic projects on developing a credit risk process to fundraising advice and strategic communications support, could be categorized as a “subsidy” — although for us it’s a way for us to enhance a company’s chance of success and generate returns.
We agree with Wharton Social Impact Initiative’s <a class="markup--anchor markup--p-anchor" href="https://socialimpact.wharton.upenn.edu/wsii-news-thoughts/impact-investing-seduced-thats-one-hypothesis/" target="_blank" rel="noopener noreferrer">Nick Ashburn and Katherine Klein</a> that there isn’t yet enough rigorous research to refuse or to refute Bolis and West’s hypothesis. Today, there is still not much public data available on impact funds’ portfolio-level performance, and we are fully behind the assertion that there needs to be a greater transparency in reporting social and financial returns.

<h3 class="graf graf--p">Shifting the perception: Acknowledging that the underserved can be a profitable customer segment and that technology enables new business models to better serve them</h3>
In our effort to provide better access to financial services for underserved segments, we try to move away as much as possible from the timeworn perception that they are a destitute population in need of a helping hand. Instead, we see them as an empowered population with needs, wants, preferences, and drive to improve their wellbeing. These customers represent real market opportunity waiting to be tapped. We hold this view against the companies we invest in. A company’s keen understanding of their target customers and how they come up with innovative solutions to serve these customers’ needs and solve their persisting pain points in a way that is significantly better and attainable is what is most appealing for us. Unilever made a big breakthrough in emerging markets by <a class="markup--anchor markup--p-anchor" href="https://hbr.org/2016/12/how-unilever-reaches-rural-consumers-in-emerging-markets" target="_blank" rel="noopener noreferrer">offering low-cost, single-use sachets</a> of consumer goods such as shampoos and deodorants that were previously too expensive for the rural populations.

We see a similar wave of innovations going on within financial services, and they are particularly driven by the advancements of technology and connectivity. Across the world, fintech startups and other financial services actors are taking advantage of the rapid adoption of mobile phone, digitization, the increased capacity of computing power, and so on, to come up with solutions that enable them to offer savings, credit, payments, and insurance to previously excluded customer segments in a way that existing players weren’t able to. In Kenya, <a class="markup--anchor markup--p-anchor" href="https://apolloagriculture.com/#home" target="_blank" rel="noopener noreferrer">Apollo Agriculture</a> uses remote sensing technology, data science, and mobile money to more efficiently and affordably finance the fertilizer and seeds that smallholder farmers need to increase crop yields. In Mexico, <a class="markup--anchor markup--p-anchor" href="https://konfio.mx/" target="_blank" rel="noopener noreferrer">Konfio</a>’s entirely digital platform allows for low-cost customer acquisition and rapid credit assessment which enables the company to offer lower rates for micro and small business loans compared to traditional brick and mortar lenders.

Coming up with an offering with a strong value proposition that is affordable for underserved customers while making the economics work well for the company is not an easy feat. But this ability is what differentiates game-changing innovators from the rest of the pack, and for scalable impact to be achieved. Over the three years of us making active investments, we have reviewed over 1,300 potential deals and have only invested in 31.
<h3 class="graf graf--p">Broadening the definition of impact</h3>
We question the definition of a “social enterprise” and the notion that only companies with such label are able to generate social impact. Many of our companies probably don’t see themselves as a social enterprise, but we invest in them because we believe in the inherent value of their offering for underserved segments. We also view impact achievement as beyond solely impacting end-customers’ well-being. How a company’s innovation can help us learn, raise a broader awareness, or influence other stakeholders is meaningful to further drive the sector.
Instead of the ever-percolating question of whether there is a tradeoff between impact and returns, we strongly believe that such binary view is not helpful for the industry. Rather, we’d like to engage actors in the space on thinking further of how we can create an industry-level spectrum of both impact and returns achievement — while being mindful of the wide variety of initiatives in the space.

The many shades of impact and returns

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

<div id="block-system-main" class="block block-system">
<div class="content">
<div class="content-node">
Washington, DC, February 14, 2017– Accion Venture Lab, the seed-stage investment initiative of financial inclusion leader Accion, announced today that it has marked its second successful exit, further demonstrating the potential for early-stage investments to generate social and financial returns. Venture Lab has sold its stake in Clip, a Palo Alto and Mexico City-based company that provides cost-effective and efficient digital payment solutions to the often financially underserved segment of micro, small, and medium enterprises (MSMEs) in Mexico.
<a href="http://payclip.com/" target="_blank" rel="noopener">Clip </a>combines a card reader plug-in for smartphones with an innovative back-end risk management platform to enable nearly any merchant in Mexico to accept all types of debit and credit cards. In doing so, it provides a pathway for small businesses to transition from cash-based systems to more efficient digital approaches that enable transactions that were previously too costly to be viable.
Venture Lab co-led the first institutional investment round in Clip in February 2013. As of December 2016, with Venture Lab’s active support, Clip has become one of Mexico’s largest digital payment solutions providers for MSMEs.
“After reviewing thousands of start-ups and working with the dozens of innovators in the Venture Lab portfolio, we’ve seen how creative and responsive fintech leaders like Clip can be in responding to the business challenges of the world’s underserved small businesses,” said Venture Lab Managing Director Vikas Raj. “We are honored to have been a part of Clip’s success in providing a pathway for small businesses to transition from cash-based systems to digital payment solutions that lower costs and enable them to serve more customers.”
“Accion Venture Lab was the first investor that trusted us with this crazy idea of bringing card-acquiring services to small businesses on every single corner in Mexico. Thanks to their initial support we are on our way to fulfilling our vision. It was a pleasure working with the Accion team,” said Adolfo Babatz, CEO and Co-Founder of Clip.
“Accion advances financial inclusion by investing in sustainable, scalable, well-managed companies that generate both social and economic returns,” said Accion President and CEO Michael Schlein. “Venture Lab’s second successful exit demonstrates the viability of achieving both profit and purpose by investing in early stage start-ups that promote high-quality financial services for underserved customers.”
Venture Lab is the world’s leading seed-stage investor in fintech for the underserved. Venture Lab invests capital in, and provides support to, innovative fintech start-ups that increase access to, improve the quality of, or reduce the cost of financial services for the underserved at scale. Since launching Venture Lab in 2012, Accion has deployed over US$10 million across more than 25 start-ups that work in over 20 countries worldwide.

Venture Lab announced its first successful exit from India-based lender Varthana in November 2016.
# # #
&nbsp;

About Accion

Accion is a global nonprofit dedicated to building a financially inclusive world with economic opportunity for all, by giving people the financial tools they need to improve their lives. We are building the next generation of top-tier microfinance institutions, and over more than 50 years have helped build 65 such institutions in 32 countries on four continents that today reach millions of clients. Our impact investing initiatives are pushing beyond microfinance to catalyze more than 30 innovative start-ups dedicated to improving the efficiency, reach, and scope of financial services for the poor. And our Center for Financial Inclusion is helping to build a stronger industry with high standards and broad engagement. Currently, our work spans nearly two dozen countries, including the U.S., where we are the nation’s largest nonprofit microfinance network. For further information, visit <a href="http://www.accion.org/">http://www.accion.org</a>.
# # #
&nbsp;

MEDIA CONTACT

Katie Mounts
<a href="mailto:kmounts@accion.org">kmounts@accion.org
</a>+1 202.280.5859

</div>
</div>
</div>

Accion Venture Lab Marks Second Successful Exit, Driving Social and Financial Impact from Investment in Clip

<div id="block-system-main" class="block block-system">
<div class="content">
<div class="content-node">
Washington, DC, November 14, 2016 – Accion Venture Lab, the seed-stage investment vehicle of financial inclusion leader Accion, announced today that it has successfully exited an investment for the first time. Venture Lab has sold its stake in Varthana, a company providing specialized loans and support to affordable private schools in India, promoting access to and the quality of education for India’s poor and emerging middle class.
Venture Lab led the first institutional investment round in Varthana in May 2013. As of August 2016, with Venture Lab’s active support, Varthana has supported more than 2,000 schools, 38,000 teachers, and one million students, and has disbursed more than $35 million to schools that serve lower and middle income Indians.
“Varthana has reached great heights as an innovative financial services operator in India, and we are honored to have been a part of the company’s success since the beginning,” said Venture Lab Managing Director Vikas Raj. “Since we invested, Varthana has been able to demonstrate the viability of its unique sector-focused approach, attract significant additional external funding, and ultimately, advance its mission to increase access to quality education for students across India.”
This spring, Varthana succeeded in raising a substantial $14 million Series B financing round.
“Accion Venture Lab’s early support of our work was essential to helping us grow and begin to fulfill our mission,” said Steve Hardgrave, CEO and Co-Founder of Varthana. “We are thrilled to help provide Accion a successful exit that will allow them to continue to focus on supporting early-stage companies.”
“Key to Accion’s approach to advancing financial inclusion is finding sustainable ways to generate both social and financial return from our investments and partnerships,” said Accion President and CEO Michael Schlein, who oversaw the launch of Venture Lab in 2012. “Our partnership with Varthana and our successful exit from this investment demonstrate the viability of Venture Lab’s approach to supporting early-stage start-ups that expand access to financial services around the world.”
Venture Lab provides both financial and non-financial support for investees, fostering experimentation and promoting business models that improve access to quality financial services for the underserved. Its equity and quasi-equity instruments are complemented by the provision of people and resources from the global Accion network.
Impact-focused Unitus Capital acted as an exclusive advisor to the transaction.

&nbsp;
###
About Accion

Accion is a global nonprofit dedicated to building a financially inclusive world with economic opportunity for all, by giving people the financial tools they need to improve their lives. We are building the next generation of top-tier microfinance institutions, and over more than 50 years have helped build 65 such institutions in 32 countries on four continents that today reach millions of clients. Our impact investing initiatives are pushing beyond microfinance to catalyze more than 30 innovative start-ups dedicated to improving the efficiency, reach, and scope of financial services for the poor. And our Center for Financial Inclusion is helping to build a stronger industry with high standards and broad engagement. Currently, our work spans nearly two dozen countries, including the U.S., where we are the nation’s largest nonprofit microfinance network. For further information, visit <a href="http://www.accion.org/">http://www.accion.org</a>.
###
MEDIA CONTACT

Katie Mounts
<a href="mailto:kmounts@accion.org">kmounts@accion.org
</a>+1 202.280.5859

</div>
</div>
</div>

Responsible Exit

Meet the Experts

Mayada El-Zoghbi

Njord Andrewes

Filter

Filter

Her dream seemed impossible, but she persisted — and 750,000 Indians benefited

Helping small businesses and farmers be more resilient in Haiti

Building better lives for Indian families

Shubham Housing attracts investment led by marquee investor Premji Invest and Helion Venture Partners & Elevar Equity

The many shades of impact and returns

Accion Venture Lab Marks Second Successful Exit, Driving Social and Financial Impact from Investment in Clip

From the Center for Financial Inclusion

Caveat Venditor: A New Model for Buyer Selection in Responsible Microfinance Equity Exits

Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits

Solving the Puzzle of Responsible Exits in Impact Investing

Who's “Responsible” for Responsible Impact Investing Exits?

What’s “Responsible” about Impact Investing Exits?

Passing the Baton – but to Whom? Considerations for Investors

The Art of the Responsible Exit in Microfinance Equity Sales

The Art of the Responsible Exit in Microfinance Equity Sales

Accion Venture Lab Completes First Successful Exit in India-Based Lender Varthana, Generating Financial and Social Returns