A report that provides a framework to microfinance investors seeking a responsible exit reveals that financial offers have a greater influence on decisions than social goals.
Entitled Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits, the report, written by microfinance experts Sam Mendelson and Daniel Rozas, shows only a minority of investors hold the congruence of a buyer’s offer with a seller’s social mission as crucial to deciding whether or when to exit a project.
“We find a consensus around a process which first excludes clearly unqualified buyers, but beyond that, gives primacy to the financial offer,” Mendelson and Daniel Rozas state in the introduction.
By formulating a framework for buyer selection comprising variants of both approaches, Mendelson and Rozas said they hope the report will guide impact investors and their advisors in future exits.
Speaking to Development Finance, the authors said they were struck by “the apparent disconnect between the stated aims of impact investors, their talk of social mission and the importance of buyer reputation on the one hand, and on the other, the clear principle that, ultimately the fiduciary obligation – the financial offer – dominates”.
While nearly all the investors interviewed saw social issues as a basis on which to discount potential buyers, “having a clear set of metrics” to compare prices meant that financial offers were an overall deciding factor. The authors said they believe this, “rather than an explicit focus on the financial offer”, explains the apparent disconnect.
Caspar Sprokel, head of equity for the emerging markets team at Triodos Investment Management, said financial offers can draw investors to the microfinance space, though he said the Dutch investment management firm believes both bankable strategy and social mission are “two sides of the same coin”.
“We do see commercial investors entering the microfinance space driven by commercial objectives, but they realise that embracing and safeguarding the institution’s social mission makes commercial sense,” Sprokel said.
Since the report’s publication in April, Mendelson and Rozas report a strong uptake of the framework, which incorporates First Do No Harm and Best Interests principles conventionally applied in medical practices. Both the authors, however, said a reverse emphasis on financial offer and social impact could produce different results to the current trend.
“We think there’s good reason to think that this relatively minor shift in the process, making the financial offer as the basis for exclusion, and the social or strategic metrics the basis for the final decision, may actually result in substantial changes in how many investors carry out their exits.”
Commenting on the general lack of guidance on buyer selection, Aurélien Hollard from Arendt, a Luxembourg-based law firm, said the pressure on board members and managers to select the most favourable financial offer is increased when opting for the right buyer.
“[The report] is particularly relevant as many microfinance investment vehicles are now divesting and asset managers are left without precise guidelines in the buyers’ selection process when exiting their investments.”
Alexander Remy, equity officer for India and Southeast Asia at Oikocredit, a microfinance investor, said that the report should be of interest to all social investors, including those who do not invest solely in microfinance projects. He added that new fund managers could also benefit from a discussion about how to align their exit expectations at an early stage in an investment.
“We seek responsible exits, but how and whether this can be performed requires balancing the ideal with the practical,” he said.
“This framework sets the tone to what the expectations of all selling investors should be. It facilitates the dialogue between the company and all selling investors when deciding what factors are important to exit responsibly and respecting the best interests of all parties.”
The report was funded by the Platform for Inclusive Finance (NpM), the European Microfinance Platform (e-MFP) Investor Action Group, and the Finance Inclusion Equity Council (FIEC).