IFMR arm raising Rs100 crore to invest in microfinance businesses

The new fund will primarily invest in debt and also have a small allocation for preference shares


Chennai-based IFMR Investment Managers provides investment management services in asset classes that impact the financially excluded.
Chennai-based IFMR Investment Managers provides investment management services in asset classes that impact the financially excluded.

IFMR Investment Managers Pvt. Ltd, part of IFMR group, is raising a Rs.100 crore debt fund to invest in the microfinance businesses, a top executive of the firm said.

Chennai-based IFMR Investment Managers provides investment management services in asset classes that impact the financially excluded. The latest debt fund from IFMR, known as IFMR FImpact Medium Term Microfinance Fund, was registered with Sebi as a category II alternative investment fund (AIF) in February.

“The first close of the fund has already happened on 10 June. As on date, the fund has made two investments into debt instruments of microfinance companies,” said Kshama Fernandes, chief executive at IFMR Capital and a board member of IFMR Investment Managers.

Although the new fund will primarily invest in debt, it will also have a small allocation for preference shares issued by microfinance firms, she said.

This is the third alternative investment fund from IFMR group. In 2014, it had launched a Rs.100 crore fund to lend exclusively to the microfinance sector.

On 18 January, Mint reported that IFMR was raising Rs.250 crore debt fund—IFMR FImpact Long Term Multi Asset Class Fund— with broader mandate of investing in microfinance, affordable housing finance, agri-business and small business loans.

According to Fernandes, while the microfinance sector is growing at a robust pace, the penetration levels are still low; hence, the group felt the need to raise another microfinance-focused fund. “Compared to the size of the population which does not have access to formal sources of credit (the World Bank estimates this at less than 10% of the adult population of India), the microfinance sector in India is still small and currently reaches about 35 million borrowers. To significantly increase the penetration of formal financial services, large amounts of growth capital will be needed,” said Fernandes. This time, IFMR has changed the investments mix to address the gaps in the capital structure facing microfinance institutions in India, she added.

With the new fund, IFMR is also looking at tapping new investors. “The tenure of this fund is 3.5 years. After launching two long-term, six-year funds, we wanted to launch a medium duration fund to tap into new investor classes,” said Fernandes.

The latest fund has seen investments from non-banking financial companies (NBFCs) as well as private wealth investors.

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The second debt fund of IFMR was raised primarily from large domestic institutional investors such as insurance companies like Birla Sun Life Insurance and Kotak Mahindra Old Mutual Life Insurance.

The purely domestic fund raisings by IFMR show increasing appetite among domestic investors to look at investing in so-called alternative assets.

Domestic fundraising through AIFs has seen a strong push in the last 12 months, after the government accorded tax pass-through status to all categories of AIFs, except for hedge funds that come under category III.

With the removal of foreign investment promotion board (FIPB) approval for foreign investors looking to invest in AIFs.

Data from Sebi shows that in the period between 1 April 2015 and 31 March 2016, funds registered as AIFs have raised Rs.13,117 crore from investors (approximately $2 billion).

According to industry experts, microfinance industry’s growth track record and the huge market potential makes the sector attractive for investors.

“Investor interest in microfinance has largely been driven by the robust growth trajectory (40%+ growth year on year) coupled with very strong return parameters (RoE, return on equity, ~16-18%) and negligible default rates,” said Ritesh Chandra, executive director at Avendus Capital.

In 2015-16, gross loan portfolio of microfinance institutions rose 84% to Rs.53,233 crore, from Rs.28,940 crore in the previous year, according to data from Micrometer, a quarterly report on the sector’s performance.

Additionally, given the relatively low levels of penetration in the target markets, the growth opportunity is likely to continue going forward, he said.

“The impetus of the government towards financial inclusion, granting of the SFB (small finance bank)/ universal bank licences and successful IPOs of the market leaders has provided incremental tailwinds to the sector,” added Chandra.

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