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3.3

# Equity case study: Banco Compartamos IPO

Banco Compartamos is one of Latin America’s leading banking institutions. It has often been quoted as a successful example of a microfinance institution going public, proving that profit can be made at the Bottom of the Pyramid (BoP).

Background and evolution

Compartamos began as a microfinance NGO in 1990, when it launched a communal banking program in the poorest neighborhoods of Mexico. In 2000, they received a license to operate as a non banking finance corporation that is able to make loans but not accept deposits (known as a Sociedad Financiera de Objeto Limitado in Mexico). The bank then raised US$70 million in debt, between 2002 and 2004, and grew aggressively to approximately 600,000 clients by 2005. Between 2001 and 2006, its compound annual growth rates were 46% in terms of clients and 60% in terms of portfolio. By 2006, the gross loan portfolio stood at$271 million with a portfolio at risk rate over 30 days at 1.1%. With a goal to have a million clients by 2008, Compartamos acquired a commercial banking license in 2006.

In 2007, Banco Compartamos filed for an Initial Public Offering (IPO).

Reason for the IPO

The purpose of the IPO was not to raise funds for operations or expansion. Compartamos did not require fresh equity as they were under-leveraged relative to other banks – Compartamos had a capital adequacy ratio of 40% versus 16% for other Mexican banks.

The main reason for the IPO came from the normal process of ownership evolution. The global nonprofit ACCION International and the International Finance Corporation (IFC) (which is part of the World Bank Group) held a significant number of the Bank’s shares at the time. A sale of the portion of the shares would free up capital that could be invested in similar institutions as Compartamos, and grow the microfinance industry even further.

While direct private sales were a possibility (and investors expressed strong interest), selling to a single investor or investor group was not preferable, as this would have a dramatic impact on its governance structure as well as social mission. On the other hand, an IPO would provide a more diversified ownership base. To ensure governance stability, Compartamos set a 30% limit on the amount of shares offered through the IPO and no individual could purchase more than 10% of the shares on offer.

Result of IPO

The share was priced at MXN 40 (US$3.65) and the total number of shares offered was 128,308,412 leading to a market valuation of approximately$1.56 billion on the offer date. Two critical ratios demonstrate the IPO’s success – price/earning ratio was 24.2 and multiple of book value was 12.8. Besides representing the highest multiples paid for a microfinance institution, the price/earnings ratio is comparable to or exceeds those of Brazilian (16), Chilean (15.6) and Mexican (24.5) banks.

Implications of the IPO for microfinance

While Compartamos’ IPO was not the first in microfinance – Bank Rakyat Indonesia and Equity Bank IPOs preceded Compartamos – it was the most successful microfinance deal in its time. The Compartamos IPO is a powerful validation of the commercial model of microfinance and that it is possible to pursue both financial and social goals.

Banco Compartamos stands out as an institution that produces extraordinary value for both shareholders and clients precisely because it has followed a fully commercial model with a double bottom line.

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