Research & Analysis

Volume Growth and Valuation Contraction

Toward the end of 2010, the asset quality of many microfinance institutions began to recover from a crisis of client over-indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua. During 2011 and into 2012, this recovery continued to bring higher microfinance equity transaction volumes. Based on the responses gathered in this year's survey, the private equity markets experienced an important increase in deal activity from the slower pace recorded in 2010. Large transactions in Latin America and the Caribbean as well as strong flows from development finance institutions in India drove the increase in both the volume and the number of transactions.

While asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the multiple expansion that had taken place up until then. This is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny, which was most pronounced in a few countries making up a significant portion of our sample (and the market), such as India. In 2011, our comparables in the public market also declined with a drop in the average valuation of the Lower Income Finance Institutions Index. We believe this reflects a wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of tradition financial institutions in emerging markets.