Equity Valuations

Equity capital flows in microfinance have grown fast in the past few years with both retail and institutional investors showing interest in this new market niche. According to the 2012 Global Microfinance Equity Valuation Survey published by CGAP and J.P. Morgan, the microfinance private equity market experienced stronger deal flow in 2011, with almost twice the number of transactions and a 43% increase in capital compared to 2010.

However, while asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the previous expansion (as measured by the Price/Book Value ratio). This is likely due to lingering uncertainties in some markets and continued public scrutiny, which was most pronounced in a few countries such as India where valuations had been overvalued and are now normalizing to more realistic levels. This decline reflects a wider trend where Lower Income Financial Institutions (LIFIs) and microfinance valuations in the public and private markets are beginning to converge toward those of traditional financial institutions in emerging markets, and are probably closer to their true value.

Despite the stronger deal flow, it is clear that the microfinance equity market is still in its early stages of maturity. The vast majority of transactions are dealt in the form of private placements, while in the public markets only three microfinance IPOs have taken place (Equity Bank in Kenya, Compartamos in Mexico, and SKS in India). Also, the need for more information on microfinance valuation remains a major challenge to establishing microfinance equity as an investment category. Little research is done on microfinance equity valuations, due to the difficulty in accessing private data and the lack of matured public markets for the industry.

In order to address this research gap in the microfinance industry, CGAP and J.P. Morgan joined efforts in 2009 to publish an annual Global Microfinance Equity Valuation Survey Report. This partnership takes advantage of J.P. Morgan’s equity research skills and expertise in emerging markets and social finance, in combination with CGAP’s microfinance market knowledge. In the past two years, it has also benefited from the support and industry experience of the Council of Microfinance Equity Funds (CMEF).

The aim of these yearly publications is to provide benchmarks for valuation of both private and publicly listed microfinance equity, in order to promote market transparency and analyze industry trends. They address some of the key questions facing microfinance investors and institutions: What is unique about the microfinance sector that may justify an original valuation approach? What are the valuation methodologies used? What are the key valuation drivers for private placement in microfinance? And what is the performance of microfinance on the private and public markets, in both absolute and relative terms?

Topic Contact: Jasmina Glisovic

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27 April 2016
As impact investing continues to gain traction, DFIs and social investors have a unique opportunity to use their equity funding instrument to contribute further to the development of financially inclusive markets and achieve sustainable impact.
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