By Eric Bellman
Private equity investments have put a premium on the valuation of microfinance companies when maybe they should be giving them a discount.
The Wall Street Journal Women exchange money at a micro-finance group meeting in Habibnagar, Andhra Pradesh.Yes, the tiny-loan business is booming, but it is much riskier than the low default rates of the business would suggest, said Avnish Bajaj, managing director of Matrix Partners India which has an investment in one of India’s largest microfinance institutions.
“There are elements of bubble in this sector,” he told a conference on money-raising for microfinance in New Delhi. (The WSJ is a conference media partner.) “Over-lending, lack of processes, excessive geographical concentration and excessive product concentration,” all make it a risky business in which to invest.
Most big investments into the sector have been through private equity. But the average Indian may soon get an opportunity to buy into the industry as the country’s largest microfinance firm, SKS Microfinance Ltd., is likely to list on the stock markets here in the next few months.
While India’s biggest and fastest growing normal banks trade at a prices of around two to three times their book values, microfinance companies have been doing deals at more than seven times book value.
“This probably does not account for the risk that should have been priced in,” said Mr. Bajaj. “There are a whole lot (of investors) that think this is the sub-prime of India.”
Valuations have shot up in the sector because there is too much money chasing too few deals. While there are thousands of microfinance organizations, very few have the scale or the potential for profit to make them good investments.
Most of the deals are done by international investors. The surprising dearth of India-based investors in the country’s many microlenders shows that the investors most familiar with the opportunities in the subcontinent know there are cheaper, less risky ways to invest in the country’s growth.
“Do investors really know what they’re buying into?” asked Viswanatha Prasad, managing director, Caspian Advisors. “We should not forget in the last two years, microfinance institutions in India, some of them have gone bust.”