Transcript Document

Social Entrepreneurship and
Social Innovation
Session 6
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Towards A Social Finance
Market-Place
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Overview
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Background
Context
Landscape
Brokerage models
Social stock market
• Case studies: Traidcraft; cafedirect;
Compartamos
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Background
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Role Of Private Sector
• Wealth creation
• Return on capital
• Profit maximisation
• Innovation
• Market making
• Individual rational actor maximising personal
utility in one off transactions?
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Role Of Government
• Govern for the common good
• Democratic mandate and accountability
• Authorise
• Procedural rights
• Coerce
• Substantive rights
• Responsible for societal equality and
fairness
• Equality of outcome?
• Equality of opportunity?
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Role Of Government
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Solve free-rider issues
Regulation for public benefit
Address individual hyperbolic discounting
Ensure economic efficiencies
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Utilities
Infrastructures
Welfare goods
Address market failures in public goods
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Government And Finance
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Sets the economic context
Regulates via legislation
History of financial markets
Consequences of deregulation
Track record in social finance since 1997
Non-UK examples
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Role of Third Sector
• Value(s) driven
• Absence of government
• Heterogeneous demand for public goods
• Absence of private sector
• Non-market goods
• Reassurance of non-distribution structure
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Complex goods/services
Third party beneficiaries
Unreliable beneficiaries
Pooled input resources
(DiMaggio and Anheier, 1990)
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Context
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Financial Markets
• Cost efficient
• Low transaction costs
• Information rich
• Up-to-date
• Value driven allocation of funds
• Success is rewarded
• Flexible and responsive
• High liquidity
Meehan et al (2004)
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Social Finance Market
• Inefficient
• High transaction costs
• Information poor
• Inconsistent or non-existent metrics
• Cause driven allocation of funds
• Success goes unmeasured and unrewarded
• Static and inflexible
• Low liquidity, limited resources
Meehan et al (2004)
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Inefficient
Unlike resource allocation in the business
world, where investors and companies
seek one another out in an informationrich environment, philanthropy is largely
a one-way street
Meehan et al (2004)
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Application Process
• Time consuming and inefficient
• Different for each cause
• Different for each source of funds
• Organisation, not mission, focussed
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High Cost
• Raising funds:
• For-profit capital market: $2-4 per $100
• Legal
• Marketing
• Admin
• Not-for-profit capital market: $10-24 per
$100
• Buying donor lists
• Direct mail/Telephone calls
• Not-for-profit CEOs spend 30-60% of time
on fund-raising
Meehan et al (2004)
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High Cost
• Allocating funds:
• Foundations: $12-19 per $100
• General overhead
• Reviewing applications
• Intermediary groups (eg. United Way): $13
per $100
• Total cost: $22-43 per $100
Meehan et al (2004)
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Information Poor
• Only 38% US charities filed a ‘Form
990’ IRS return (2002)
• Hard to obtain
• Of these, 15% included serious errors
• No uniform not-for-profit accounting
standards
• No single regulatory authority
• Very fragmented market
Meehan et al (2004)
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Resource Allocation
• Distorted by:
• Cause/mission focus
• History of institutional loyalty
• Lack of performance driven resource
allocation
Meehan et al (2004)
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Static Market
• Financial contributions are largely final
and irreversible
• Grant not investment
• Cannot be withdrawn easily
• Lack information to judge subsequent
funding
Meehan et al (2004)
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Landscape of Social Finance
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Drivers Behind Social Finance
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Social Finance
The system of finance supply and distribution to support
socially entrepreneurial approaches to public and
environmental challenges. Social finance, therefore, is
more than just the flow of money into social or
environmental projects. It is conceived as an ethos about
the way money is used…social finance can be seen as the
discourse around such flows that is developing in
concrete terms in the new institutions of supply,
intermediation, and demand. This is a discourse in flux
with competing perspectives driving the debate
Nicholls with Pharoah (2008)
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Social Investment Options
• Not-for-profit/charity that generates exclusively social
value
• Non-market rate
• Social enterprise that is profit-making but also has a clear
social/environmental purpose
• Sub-market/market rate
• Commercial opportunities in deprived areas
• Market rate
• ‘Social firms’ that employ disenfranchised members of the
community
• Sub-market/market rate
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Spectrum of Financial Return
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Spectrum Of Social Finance
Financial
Instrument
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Purpose of
Finance
Type of Finance
Example
Private Grant
Fulfilling Mission
Capacity Building
(Venture) Philanthropy
PRI
MRI
Impetus Trust
FB Heron Foundation
Calvert Foundation
Government
Grant
Regeneration
Market Development
Community Development Loans
Unclaimed Assets
Community Development Finance
Institution (CDFI)
Social Investment Back
Government
Contracts
Outsourcing Welfare
Services
Contractual Exchange
Greenwich Leisure
Ealing Community Transport
Debt
Economic and Social
Development
Micro-Finance
Grameen Bank
CitiBank
Quasi-Equity
Growth Capital
Share of Ownership
Bridges Community Ventures
Catalyst
Sub-Market
Equity
Growth Capital
Restricted ‘Ethical’ Shares
Cafedirect
Ethical Property Company
Market Equity
Growth Capital
Standard Shares
London Bridge Capital
Compartamos Bank
Joint Equity
Start-up/
Growth Capital
Co-operative Ownership (IPS)
Mondragon
BayWind
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Demandside
• Charities
• 168,000
• Total income of £40bn
• Social enterprises
• 55,000
• Total income of £27bn
• Community Interest Companies (CICs)
• 2,000 since 2005
• No information on income
• Co-ops
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Charity Finance
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Supplyside
Risk level Minimal
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Low
Medium
High
Provider
Banks
(Triodos)
CDFIs
Charity Bank
Local Investment
Funds
Bridges C.V.
Venturesome
Impetus
Adventure
Capital Fund
BigInvest
FutureBuilders
Charitable
Trusts
Government
Equity
Current
Funds
Available
Extensive
£181m
£62.5m
£40m
£15-20m
£3.5m
£12m
£250m
1m EURO
£2.7bn
£5bn
>£10m
Potential
Loss
<1%
1-10%
10-50%
100%
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Structured Finance
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The Investor Universe
- 100%
- 15%
Grant-makers
?
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0%
Capital-protected
+ 8%
Market-rate return
Structured Finance
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Supply And Demand
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Landscape of Social Finance
INTERMEDIARIES
Credit
Unions
MicroFinance
Institutions
ETHEX
Banks
Government
Dedicated
Intermediaries
Charities
Social
Enterprises
CDFIs
Philanthropists
Co-ops
MicroEntrepreneurs
Social
Firms
N-F-P Social
Entrepreneurs
DEMAND
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Tax-Payers
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP
Ethical
Investors
Market
Transactions
Members
VP
Funds
SIB
Foundations
Commercial Investors
SUPPLY
Brokerage Models
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Policy and Social Enterprise
• The formation of a Social Enterprise Unit within
DTI (2002), now incorporated within the Office
of the Third Sector
• The establishment of an Office of the Third
Sector within the Cabinet Office with its own
Minister (2006)
• Key objectives:
• To better understand the sector and its impacts
• To provide an ‘enabling environment’ for it to flourish
• Tory policy too now!
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Policy and Social Enterprise
• To find solutions to some of societies’ most
entrenched social problems
• Over half social enterprises surveyed in 2005 were
located in the 40% most deprived areas
• To support the growth in ethical markets
• Between 1999 and 2004 the sale of Fair Trade marked
food grew by more than 640%
• To support the development of a social finance
marketplace
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Policy and Social Enterprise
• SEs improve public services
• Social enterprises are active in many public sector
markets – particularly health and social care
• At their best they offer a high level of engagement with
users and a capacity to build trust
• SEs increase overall levels of enterprise
• 55,000 social enterprises generate £8.4bn to GDP pa
• The social enterprise model appears to be more
attractive to women and certain ethnic minority groups
than conventional business models
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Policy and Social Enterprise
• Not to create social entrepreneurs but to create
the environment in which they can succeed
• That means government can act as
• Catalyst – government can help to overcome address
market failures or barriers to growth
• Customer – government can purchase services from SEs
• Champion – government can help to overcome
information failures
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Policy and Social Investment
• Social Investment Task Force (2002)
• Phoenix Fund (2002) to capitalise CDFIs
• Bridges Community Ventures Ltd (2002) to provide
investment specifically for small businesses in deprived
areas
• Founded by Sir Ronald Cohen (Apax Partners, 3I) and Tom
Singh (New Look)
• Initially raised £20 million from the private sector and £20
million in government matching investment
• Started investing a second fund in 2006
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Policy and Social Investment
• Adventure Capital Fund (2002), worth £15
million, to offer longer-term financial and
development investment to support community
enterprise growth
• Community Asset Transfer fund of £30 million to
support local authority asset transfers into
community ownership (2002)
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Policy and Social Investment
• Community Investment Tax Relief (2003) to
provide investors with an income tax break on
investment in social purpose organisations in
deprived areas
• CITR has attracted around £40 million of investment
in the sector
• Longer term contracting between government
and social enterprises (DTI, 2003)
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Policy and Social Investment
• Futurebuilders (2005) fund worth £215 million to
offer investment packages of
grants/loans/technical support for organisations
to bid for government service-delivery contracts
• Two pilot funds (2006), worth £200k, for
innovation in encouraging private sector
investment in social enterprise
• £10 million fund for social enterprise (2006) in
recognition of the need to stimulate growth
• Social Investment Bank?
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Landscape Of Social Finance
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Social Investment Bank
Government
Banks
Private Sector
Social Investment
Bank
National and regional intermediaries
• CDFIs
•Venturesome
• Charity Bank
• CAF bank
• Credit Unions
• Princes Trust
• Bridges
• Futurebuilders
• Social Investment Scotland
• Ulster CIT
• Big Invest
• Triodos
• Unity Bank
Third Sector
Social investment will be greatly increased by the SIB if private sector capital is
brought to the market by intelligently blending it with incentives and expertise.
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Social Investment Bank
• Four initial activities that should attract significant
additional finance into the sector:
• Capitalise present financial intermediaries and fill gaps in the
marketplace
• Develop the provision of advice, support and higher -risk
investment so as to accelerate the growth of demand for
repayable finance
• Develop programmes of sustained investment in specific markets
such as community regeneration and financial inclusion
• Support existing and new intermediaries in their efforts to raise
private capital
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Market Building Activities
• Bond issues supporting community finance
• Opportunity for an SIB to support structural
reform of the social fund (currently a government
delivered soft loan fund)
• Opportunity to raise capital from bond issues that
would then be lent on through credit unions and
CDFIs
• Funds could also be lent on through new direct
banking services
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Private Brokerage Models
• Xigi
• www.xigi.net
• GEXSI
• New Philanthropy Capital
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• Founders:
Bain & Company
Deutsche Bank
Foursome Investments
GTZ-Deutsche Gesellschaft für Technische
Zusammenarbeit
• Open Society Institute
• Schwab Foundation for Social
Entrepreneurship
• PricewaterhouseCoopers
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•
•
•
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• Social investment aims:
• Quality: by way of greater social
investment effectiveness in the finance and
social entrepreneurship sectors
• Quantity: by way of financial ‘additionality’,
enlarging globally the revenue pool
available for social investment
• Operational 2004
http://www.gexsi.org/index.html
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• Development deals
• Support civil society projects and programs
• Bring together private and public social
investors with social entrepreneurs and
social purpose organizations
• Created in tandem with ACCESS
(Keystone)
• Ratings agency designed to give SEs
recognition under a common, global
profiling system
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• Quality assurance and risk management
• Based on new, independent rating,
implementation reviews, and assessments
of effectiveness
• Strategic advice
• GEXSI, in association with the institutions
of its founders, and especially with GTZ,
can tap into a worldwide system of on-theground development experts in some 120
countries
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• Founded 2001
• A bridge between donors and charities
• Researching a social issue and
highlighting effective organisations that
will flourish with additional funding
• Employs analytical tools used in finance
and business in the voluntary sector
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• International in scope
• 2001-4, advice on:
• £18m donations
• £20k-£1.5m per donation
• 50 charities
• Global Philanthropy Forum
http://www.philanthropycapital.org/
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Ethex
• Founded by Triodos Bank
• Matched bargain market
• Listings
•
•
•
•
•
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Ethical Property
cafedirect
Renewable Energy Fund
Golden Lane Housing
Triodos Bank NV shares
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Social Stock Market
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High
default
risk
Grants
(100%)
No Trading
Revenue
Trading
Revenue
And Grants
Potentially
sustainable
- 75%+
Trading
Revenue
Profit
Breakeven Profitable Distributing All Revenue
Surplus
Socially
from Trading Not Distributed
Driven
Profit
Maximizing
Foundations, Government
Impetus (venture philanthropy 4m)
Futurebuilders (public services 125m)
Patient
Capital
Adventure Capital (community 2.7m)
(50%)
Equity and
equity/like
capital
(10-20%)
Venturesome (2m)
CDVC Funds
Gap for Social Equity Capital
Loans
(1-10%)
Low
default
risk
Foursome
(40m)
London Rebuilding Society (0.5m)
CDFIs and Banks (Triodos 50m, Charity Bank 10m)
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Regional
funds*
Objective 1
and 2
funds*
Equity-Like Capital
Equity-like capital is not centrally based on
ownership of the shares of the company
which avoids problems that social
enterprises have historically had with issuing
equity. Equity-like capital is structured as
subordinated debt, which has equity-like
features
Howard (2004)
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Social Equity
• Alternative Public Offering (APO)
• Off-market
• EthEX (Triodos)
• Restricted control
• Soft returns (0-3%)
• Traidcraft
• Cafedirect
• Ethical Property
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Uses of Social Equity
• Suitable for high potential social
ventures
• Social enterprises
• UK 5,300
• Socially driven businesses
• UK 500
• Other NFPs?
Howard (2004)
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Sources of Equity
• Public
• Clear demand
• Institutions
• Pent-up demand
• Business angels
• No evidence
• Venture philanthropy funds
• Emerging
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Equity Constraints
• Market Liquidity
• Exit strategies
• Financial returns
• Unfavourable risk-return profile
• Legal structures
• Control issues
• Ownership role of grants
• Role of prior investments?
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Social Equity Issues 1984-2005
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Social Equity Issues
Organisation
Shared Interest
Ethical Property
Date
Type
Amount (£m)
1995; 1996; 1997;
1999; 2001; 2002;
2003; 2004
Bond
(5yrs)
8.3
1999; 2002
Shares
5.5
(1.0; 1.0; 1.3; 1.0; 1.0;
1.0; 1.0; 1.0)
(1.3; 4.2)
1984;1986;1991;
2002
Share
cafedirect
2004
Shares
5.0
Baywind
1996; 1997
IPS
Share
4.8
Tradecraft
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5.15
(0.3; 1.0; 0.6; 3.25)
(3.1; 0.7)
Case Studies
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Traidcraft Case
• What are the financing options for growth
open to Traidcraft?
• What are the implications of offering
equity?
• How can Traidcraft best balance mission
and commercial objectives?
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cafedirect
• 2004 APO: £5m = 51% of company
• £1 per share
• Four founders retained 40.5% of total
equity and held one Guardians’ Share
• Maximum stock holding = 15%
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cafedirect
• Capitalisation (2004) = £9.8m
• Earnings (2004) = £146k
• P/e ratio = 1.00/0.03 = 33
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cafedirect
Number of
Shares
68
Number of
Shareholders
% of total
shares
1-300
1233
4.1
301-500
1531
8.4
501-1000
1185
12.5
1001-5000
548
16.8
5001-10000
32
3.2
10001 and over
29
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Moving Share Price
• Earnings multiple
• Trading not asset-based
• Expectation of sustainable earnings
• Advised by Brewin Dolphin to 14x
• 7.1% return after tax
• Issues
•
•
•
•
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Interest rates 3%
Inflation 2%
FTSE food/beverage returns 6% (P/E 16.7)
Ease of selling (liquidity)
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Earnings
• Profit before tax
• Adjusted:
• Add back 80% of PPP investment
• ‘Normalise’ for long-term US$ rate
• Deduct tax charge
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Adding Back 80% of PPP?
• Recognises that ‘financial return’ is reduced
• Due to ‘social return’ from investment in producer
organisations
• But recognises that this gives financial benefit of 20%
(eg continuity of supply during price volatility)
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Adjust For US$ Rate?
• Recognises profitability is subject to fluctuations
in the US$
• Adjustment ‘normalises’ profit using long-term
average of $1.72
50
2
45
40
1.5
35
30
25
1
20
15
0.5
10
5
0
0
2000
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2001
2002
2003
2004
2005
US$1.72?
5-year forward
5-year average
share issue planning
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Adjusted Share Price
(£k)
add:
adjust:
Profit before tax
802.2
80% of PPP investment ( £574.0)
Long-term US$ exchange rate $1.72
459.2
(250.0)
1,011.4
less:
Tax charge, based on adjusted profit
Earnings
Earnings x multiple of 14
Divide by: No of Shares in issue
Price per share
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(290.3)
721.1
£10,095.8
8,995.4
£1.12
Compartamos
• 1990 Established as an NGO
• 2000 Moved operations to a regulated
finance company
• 2002 Issued debt on Mexican bond market
• 2006 Authorised to operate as a full-service
bank
• 2007 IPO
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The IPO
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APO Or IPO?
• Pre-IPO: $6.3M in grants catalyzed $130M in
private, commercial resources
• CGAP: $2M grant included no covenants about
future interest rates or profit levels
• Was the aid money from early years used
inappropriately to enrich private investors?
• Are Compartamos’ exceptional profits and high interest
rates they are built on defensible in light of the
company’s social bottom line?
• Are they in line with the development objectives of its
principal shareholders?
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Grants And Soft Loans
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Interest Rates
Global MFI average interest rate: 30.9%
Global MFI loan size as % of GNI: 43.5%
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Interest Rates
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Interest Rates
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Interest Rates
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Interest Rates
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Interest Rates
Cost of funds is
significant contributor
Largest share
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Interest Rates
For-profit corporation formed
All earnings retained up to this point
2006: ¼ earnings paid in dividends
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Interest Rates
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Key Issues in APOs
• Share price
• Role of ‘social’ investment banks
• Exits and profits
• For whom?
• How distributed?
• Trading and price
• Liquidity
• Speculation
• Profiteering
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