Microfinance Private Equity

Interview with Bellweather Fund on Private Equity Acquisitions

My colleague Akhand Tiwari and I are writing a case study on the first acquisition in Indian microfinance, Sonata Finance’s purchase of Jeevika’s (a non-profit livelihoods organisation) loan portfolio in August 2007 (press release found here). The study should be up on the CMF website by the end of the week, but I thought it would be cool to post one of the two interviews (over e-mail) that we had with Bellwether Microfinance Fund, a private equity fund that helped organize and finance the acquisition. Bellwether is based in Hyderabad, and specifically focuses on microfinance.

This interview was with Venkatram Reddy of Bellwether, who played a lead role in Annupurna’s acquisition of Maxwealth’s (another non-profit) loan portfolio. The fall 2008 acquisition was for Rs. 193 million (~ USD 3.94 million), and Maxwealth’s senior management did not join Annapurna’s microfinance group. Instead the non=profit’s management team used the buyout as an opportunity to focus more on the non-profit’s livelihood activities. As context, Annapurna is based in Hyderabad, and Maxwealth conducted microfinance activities in and around Hyderabad.

Enough from me, below is our interview. Would love to hear thoughts on these types of acquisitions or Mr. Reddy’s comments . . .

bellweather microfinance fund

Bellwether’s Responses on Annupurna-Maxwealth Acquisition
(Interview with R. Venkatram Reddy, Principle–Investments: Via E-mail, January 2nd, 2009)

A) Initial thoughts on the Acquisition:

1. Why did Bellwether think the Maxwealth acquisition was a good idea?
ICFAI-sponsored Maxwealth trust started their microfinance operations in Hyderabad to support income generating activities of urban poor to help ensure quality education for the poor children. The senior management of Maxwealth trust visited well- run MFIs in India to understand the microfinance business and its impact on customers before starting the program. The trust has highly experienced and quality field people from leading MFIs. More than 90% of the filed staff had around 4 years of microfinance experience, and their intention to build professional microfinance institution with high portfolio quality has been achieved in a short span of time. Hence we felt that acquiring Maxwealth would be very beneficial for our investee company, Annapurna. Also, Bellwether has one such successful acquisition under its belt (Sonata – Jeevika) where the benefits of acquisition are clearly visible.

2. What attributes of Annapurna made it a good candidate for expansion?
When Maxwealth trust approached Bellwether with their intention of having of an NBFC microfinancé program, Bellwether decided that the acquisition shall be pursued by Annapurna Financial Services Limited (Trident) due to the following reasons:
1. Annapurna Financial Services’ (AFS) proximity to the operational area of Maxwealth Trust.
2. Similarities in business model
3. Matching profiles of field staff
4. Strong microfinance background of Mr.Kishore (founder of Annapurna) and his orientation towards people
5. Annapurna’s Ambition of rapid business expansion

B) Bellwether’s Role in the Acquisition Process:

1. What role did Bellwether play in working with other stakeholders during the acquisition process?
Bellwether’s role included:
a. Due diligence of Maxwealth’s Microfinance program along with promoter of Annapurna, Mr. Kishore
b. Roll out of a plan for the acquisition process including commercial discussion
c. Instrumental in bringing Maxwealth and AFS on a same platform for attaining smooth acquisition
d. Played a key role in bank funding to AFS for purchasing the portfolio
e. Infused the capital in to AFS to ensure future growth and other business requirements like HR, Branch expansion and infrastructure

2. Did you play a role in the valuation process of Maxwealth loan portfolio?
Bellwether played a key role in the valuation exercise along with the promoter.

3. Did Bellwether provide support during the integration process? If so, what type of support did you provide?
Yes. At board level and also Bellwether is a part of the transition committee that meets more frequently to address issues related to HR, portfolio and positioning of the combined entity in the market.

C) Evaluating the Success of Integration:

4. How do you evaluate the success of the acquisition? Do you use a list of objectives/achievements to measure medium or short-term success?
Commenting on the acquisition’s success requires more time as the acquisition happened in September of 2008.

5. In your view, what have the main challenges been during the integration process? What has been the experience so far?
Some of the following were assumed as key challenges for AFS while doing the acquisition of Maxwealth portfolio.
• Difference in salary structure
• Retaining of experienced staff
• Rural and urban portfolio mix
• Alignment of work culture

AFS, given its promoter and key management’s track record, has been in a position to handle above challenges in an amicable manner. Some of the experienced field staff from Maxwealth has been assigned with higher responsibilities to match with their salary structure by showing a visible career path. Even though there is a difference in urban and rural scenario, the customers’ profile, the model, and the systems followed by Maxwealth are not very different from AFS. As the AFS promoter has proven institution and team building ability shown in previous assignments, we do not expect the integration of staff from both entities will be an issue.

6. Do you think consolidation in the microfinance industry in India is a good idea? In what instances is it most beneficial?
I feel that this is a definitely a good idea as consolidation enables the institution to visualize the bigger things which leads for better positioning. Such acquisition also helps an MFI increase its outreach in terms of portfolio size, experienced staff and number of customers, thereby increasing its overall value proposition in the market.

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