CGAP Reflections on the Compartamos Initial Public Offering
On April 20, 2007, Banco Compartamos, a microfinance institution (MFI) that was launched in 1990 and originally funded by grants from various sources, including CGAP, completed a landmark initial public offering (IPO) of its stock. The IPO was 13 times oversubscribed and considered a huge success by any financial market standard. Pent-up demand caused the share price—representing 30 percent ownership in the bank—to surge 22 percent in the first day of trading. Demand was driven by the exceptional growth and profitability of Compartamos, a dearth of Mexican investments for emerging market portfolios, rarity value, strong management, and the appeal of microfinance.
The spectacular success of the IPO was a milestone not only for Compartamos, but for microfinance. Mainstream international fund managers and other truly commercial investors—not socially responsible investors—bought most of the shares. The transaction will probably give a significant boost to the credibility of microfinance in commercial capital markets and accelerate the mobilization of private capital for the business of providing financial services to poor and low-income people. However, the Compartamos offering has raised serious issues for many in the microfinance field and beyond, especially in view of the huge profits that it produced for Compartamos shareholders.
This paper focuses on three questions:
- Was the aid money that was granted to Compartamos in its early years used inappropriately to enrich private investors?
- Are Compartamos’ exceptional profits, and the high interest rates they are built on, defensible in light of the social bottom line that the company identifies as part of its purpose, and consistent with the development objectives of its principal shareholders?
- Does the IPO alter the governance of Compartamos in ways that will make it harder for the company to balance social and commercial objectives, especially when there are choices to be made about whether money goes into shareholders’ pockets or clients’ pockets?
Rich Rosenberg concludes that the public aid money given to Compartamos has not been inappropriately diverted to private pockets. He also thinks that the Compartamos decision to grow fast was defensible from a development point of view but he questions the way that growth was funded. Apparently Compartamos and its shareholders say that unusually high profits were a necessary part of the equation: “[t]he returns received have become retained earnings and allowed the institution to nearly double its reach over the last three years, something it could not have done any other way.” Rich disagrees. The years since 2000 have seen what can only be described as a flood of new publicly owned or socially motivated investors –”international financial institutions” (IFIs) and “microfinance investment vehicles” (MIVs)—who are anxious to invest large amounts in debt and equity of MFIs. Thus Compartamos could easily have raised funds for growth from additional borrowing, particularly as it was not heavily leveraged at all.
The Compartamos affair thus becomes one of governance. Rosenberg says “it is hard to avoid serious questions about whether Compartamos’ interest rate policy and funding decisions gave appropriate weight to its clients’ interests when they conflicted with the financial and other interests of the shareholders”. He goes on to observe: “One needs to be realistic about commercialization of microfinance. Although it brings the advantage of access to much greater funding and allows exponential expansion in the number of people served, one cannot be too shocked if a for-profit corporation starts acting like other businesses. But in the Compartamos case, a controlling majority—two thirds of the shares—was held by three pro-bono shareholders who were committed to development objectives, not profits. At a minimum, one wants to ask why they did not insist that greater weight be given to the interests of Compartamos’ clients.”
A hot debate raged on this topic in both DevFinance and the Microfinance Practice discussion lists. Dave Richardson of WOCCU provided a great deal of additional analysis and critique – his key posts are provided here for ease of reference, plus one from Roy Mersland.