India: Angel Investment Opportunities with MFIs
This month I took a trip to India for 3 weeks to study the microfinance industry. MFIs in India are in a position where they are unable to collect savings due to government regulation, so they rely on private equity as a way to raise the capital to fund loans. Currently, the microfinance industry is going through a small crisis in India due to threats of increased government regulation, but many MFIs are still looking for funding to grow their business. Some MFIs are even expanding their business by offering larger loans to clients that have completed several successful loan cycles and are now ready for more capital or to new clients that have SME-sized businesses. The SME segment of the market in India is relatively un-serviced by commercial banks. MFIs offer loans to micro-entrepreneurs and banks offer loans to large businesses, but many small and medium sized enterprises are left without access to substantial funding. These businesses are often referred to as the “missing middle” by industry experts. Many MFIs are expanding their models to service these “missing middle” clients and have become very successful in this segment.
I spoke with several players in the microfinance industry in India, and the main focus for most organizations is raising capital in a way that will grow the business without sacrificing the social mission. There have been a few big players in the industry that have taken private equity capital and have had to raise interest rates and change the organization’s mission in order to answer to investors. Many MFIs are looking for an alternative investment, such as patient capital, in order to grow the business while maintaining the social impact. Some MFIs have turned to angel investors from the US as an alternative to private equity. The angel investor community is not strong in India, but there are several angel investors from the west who have chosen to invest in India. Angel investors offer MFIs a smaller amount of capital than a traditional PE firm, but demand a more reasonable return (20-25%), and a more hands-off approach to managing the business.
Overall, there are many opportunities for angel investment in India. In the MFI industry alone, there are many exciting opportunities to invest in organizations that have a strong and developing client base, grow at 50% or more each year, are expanding to give loans to SMEs, and have highly educated and experienced leadership. Angel investors that want to make a difference in a developing country by investing in organizations that create jobs and livelihoods while also earning an adequate return on investment should look into the MFI investment opportunities in the growing markets of India.