By Dirk Elsen, Director of Emerging Markets at Triodos Investment Management

'Since the start of our role as investor in inclusive finance in 1994, equity investments have been part and parcel of our strategy, alongside regular debt financing. Looking at our year-end 2013 portfolio in inclusive finance, over 25% our overall portfolio consists of equity stakes in more than 20 leading and innovative microfinance institutions, banks and vehicles worldwide.  

Building long-term relationships

Why this focus? For us it is key in building meaningful long-term relationships with our investees. Our approach typically is that of an active minority investor. We take a minority stake and play an active role on the Board of Directors, sharing our knowledge and expertise about sustainable banking and contributing to the governance of these institutions. And most importantly, as a mission-aligned shareholder we are in for the long-term, not driven by exits. The open-end structure of our funds allows for this long-term approach. This gives us the great opportunity to be closely involved in an institution’s growth and exciting journey to the next level of development. And to contribute to the responsible development of a financial sector in developing and emerging markets.

Maturing institutions and sector

However, the sales of our equity stake in Sathapana in Cambodia in 2012 and more recently the (partial) sale of our stake in XacBank in Mongolia and ACLEDA Bank Plc in Cambodia indicate that there also comes a time for us to step down as a shareholder. These institutions had achieved a level of maturity as a fully-fledged bank, in terms of outreach, governance, risk management and performance. We felt that a new strategic investor was needed, bringing valuable expertise to further the growth and development of the institutions. This indicates the maturing of the inclusive finance industry but also raises the question for us ‘how to make a responsible exit from an institution in which we have invested over the years, in some cases a decade?’

Investee-focused approach

Each institution, and thus each exit transaction, has its own unique dynamics. Starting point for us are the interests of the investee. Is the time ripe for the financial institution to bring in a new strategic shareholder? As mentioned earlier, our funds don’t have a fixed term with an exit timing built into the prospectus, which allows us to take this investee-focused approach. And if yes, our second consideration is ‘is this new shareholder aligned with the investee’s mission and vision?’ We ensure that mission and vision are part of discussions with potential buyers and as much as possible include reference to it in legal documentation.

Evolving practice      

Exits of equity investments is a learning-by-doing process, and a practice that is still evolving. CGAP’s recent publication ‘The Art of the Responsible Exit in Microfinance Equity Sales’ helps to get a focused discussion on this very important topic in the ever-changing and maturing landscape of the inclusive finance sector. As an equity investor, we are very much looking forward to sharing our insights and learnings on this topic in the coming years.'

Director of Emerging Markets - Dirk Elsen joined Triodos Investment Management as Director of Emerging Markets in January 2012. From 2002 to 2011, he served as Chief Executive of SNV, an international development organisation implementing advisory, advocacy and knowledge brokering work in 36 countries across four continents. Before that, Dirk worked at Shell, the World Bank and ABN AMRO, working as a corporate and operational lawyer on projects in Africa and Asia, structuring trade finance business and serving in various senior relationship management roles.