IMPULSE MICROFINANCE INVESTMENT FUND

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1 IMPULSE MICROFINANCE INVESTMENT FUND INVESTMENT OBJECTIVES AND GUIDELINES Investment objective The Investment Fund is being established primarily to build a well-structured portfolio of microfinance investments, in view of making socially responsible investments in a promising high growth industry. That objective targets to offer to the shareholders of the Investment Fund an attractive financial return, as well as deliver positive impact to the wider society, thus creating added value on the so-called double bottom line. Micro-enterprises and SMEs generally suffer from a range of problems in their establishment and development. Among these problems, finance is perhaps the most central. Although the microfinance sector has grown and has commercialized significantly over the last thirty years, demand still far exceeds supply and capacity. The Investment Fund aims to contribute to the building of inclusive financial sectors - one of the priority themes of the International Year of Microcredit by investing its money in well-run local microfinance institutions (MFIs). The Investment Fund shall invest in MFIs within the logical context of their institutional build-up and within the framework of their business-plan. The Investment Fund will operate on commercial terms providing timely and demand driven financing for a host of microfinance institutions. The targeted portfolio return will be slightly above money market instruments. The Investment Fund will strive to realize a margin above the prevailing money market interest rates in either USD or EUR. Investment guidelines Investment decisions are based on the guidelines provided hereunder. Investment sectors The Investment Fund will specialize in one investment segment, namely microfinance, wherein a number of sub-categories can be identified. These microfinance investees can have different legal forms, such as: Microfinance NGOs Transformed Microfinance Institutions, such as Non-Bank Financial institutions Credit Unions Microfinance banks, such as Community Banks Specialized small-business banks Finance companies specializing in microfinance Microfinance investment funds The geographic area of operation of the Investment Fund shall include all countries which qualify as Developing Countries and Countries in Transition according to the DAC-List of the OECD. Country risk and currency exposure will be part of any investment analysis. Investment criteria MFIs are eligible when: Impulse Investment Guidelines 1/5

2 They have a strong commitment to providing financial services to SMEs and/or micro-enterprises They are a high potential institution. The Investment Fund will consider: Range and quality of services offered Ownership and governance Management capacity Performance and sustainability The Investment Fund will invest in MFIs, which are managed by experienced and ambitious teams who are capable of turning their mission, vision, strategy and business-plans into reality. MFIs with following characteristics will be invited to apply: Track record of minimum three years of operations Commercial viability evidenced by historical positive cash flow Active loan portfolio > 2 million euro Sound portfolio quality performance Professional management of assets and liabilities, with a healthy structure of equity and debt Business strategy that underscores target market and institutional positioning A solid business-plan demonstrating the financial feasibility of future plans. The business plan should show forecasts with assumptions on the projections, and needs to point out the financial needs. Able to provide good quality financial reports on a regular basis, and have a cash flow forecasting system in place. Externally audited Additional provision of external ratings and performance evaluation reports are encouraged, and will be viewed favourably in the evaluation process. The Investment Fund will seek to diversify its investments across regions, countries and investees, and will concentrate no more than 20% of its committed capital in any country and no more than 15% of its committed capital in any investee. Investment instrument characteristics Forms The Investment Fund s portfolio investments may take a variety of forms: Common and preferred stock Debt instruments, such as direct loans or credit lines Syndicated loans Purchase of bonds or other interest-bearing instruments issued by MFIs Bank guarantees that will mobilize capital for MFIs Convertible and subordinated debt Warrants and options to acquire equity interests Other mechanisms and forms that will respond to the overall Investment Fund objectives The Investment Fund shall invest a maximum of 20% of its Portfolio Investments into equity investments. In connection with a portfolio investment, the Investment Fund may engage in hedging transactions designed to reduce the Investment Fund s exposure to currency fluctuations and/or declines in the value of such portfolio investment or other related risks; provided, that the Investment Fund shall not be permitted to acquire derivative instruments for speculative purposes. Impulse Investment Guidelines 2/5

3 The Investment Fund will set up adequate liquidity management, and may therefore invest excess liquidities in money market instruments. Size Transaction amounts of portfolio investments will usually vary between euro and 1.000,000 euro. Several transactions can be set up with any individual MFI at any given time. Tenor In general maturities of investments are projected to be medium term, up to seven years. The timing of exits in common equity investments is still far from straightforward in this industry, as there is no second market. Exits therefore must be structured through put-options in private contracts facilitating the desired timing of the exit. As far as debt-linked investments are concerned, maximum tenor of loans will be limited to five years. No investment of which the maturity exceeds the lifetime of the Investment Fund (the Investment Period ) shall be considered. Currency The Investment Fund aims to provide to a maximum extent investments expressed in euro and US dollar. The Investment Fund will conduct an active control over foreign exchange and interest risks. In addition, it will further minimise risks of foreign exchange fluctuations by building an adequate level of international diversification. Return The Investment Fund will seek a fair and competitive rate of return on each investment. The required return or pricing of any investment may vary, and is based on: Benchmark yields and pricing Maturity/tenor Risk appraisal The investment's expected return should be consistent with the Investment Fund s overall target portfolio return criterion. On the one hand, since this is targeting a margin over the money market rates of return, for loans floating interest rates will be the more prevalent. These floating rates will be linked to LIBOR USD or EURIBOR 6 months. Equity investments will either be structured in preferred stock generating a steady return, or taken in very performing MFIs providing strong perspectives to generate an upside. Guarantees The Investment Fund will use its best efforts to obtain guarantees when making investments in MFIs. However, it should be realized that it is hardly possible in the microfinance industry to provide loans against collateral or to obtain guarantees when making equity investments. In practice, investment risks will be minimised primarily through a prudent selection of suitable counterparts, based on the understanding of the business model. The Investment Fund however reserves the right to require additional collateral for certain investments. Insurance As the target market inherently bears considerable political risks, the Investment Fund may choose to obtain insurance for certain investments against political and/or transfer Impulse Investment Guidelines 3/5

4 risk. In such case the cost of insuring will to the largest possible extent - be charged to the investee. Investment procedure 1. Deal origination By virtue of the Management Company s intelligence on the target market, the Investment Fund anticipates an extensive flow of attractive investment opportunities. 2. Pre-selection Initial screening will check the receptiveness of any application 3. Detailed assessment Once an investment target is identified and passes the initial screening, a detailed analysis of application and applicant will examine all relevant aspects regarding feasibility and risks. Usually the Management Company will conduct an extensive on-site due diligence review at this stage of the process. In order to be able to assess and to control the risks involved, a management model has been drawn up that takes into account risks arising from the counterparties, the market and the environment. The assessment of counterpart risks is to a significant degree based on a prior investigation that focuses on the following points: o Conducting a rigorous financial condition analysis; o Assessment of the business plan; o Evaluation of the management and the board of directors. 4. Investment committee All investment portfolio decisions are taken by an investment committee composed of financial and other experts offering solid expertise for: o Making investment decisions ; o Establishing investment conditions; o Portfolio composition management. 5. Structuring and concluding investment transactions 6. Follow-up of the investments On-going monthly and quarterly monitoring of quantitative and qualitative issues plus annual on-site visit by the Management Company. The above investment guidelines shall be subject to the interpretation in good faith of the Management Company and the Investment Committee. Exit Strategies Impulse will not be engaged in any operational activity of its Portfolio Investments. Its on-going profit stream will comprise of (i) interests from loans extended to MFIs and, to a lesser extent, of (ii) dividends from equity shareholdings. The Investment Fund s prime objective is to generate a solid recurrent annual flow of income from interests and dividends, out of which Impulse will finance an annual pay-out to its Shareholders. It is anticipated that the loans and equity investments may have an average tenor or holding duration of five years. As Impulse has an Investment Period of 12 years Impulse Investment Guidelines 4/5

5 (extendable with two times one year), such Investment Period shall enable Impulse to undertake two subsequent investment cycles of approximately five to six years. The exit of the Investment Fund s loan investments evidently coincides with the final repayment of such loans. For equity investments, the Investment Fund will endeavour to achieve exits through a put-option, to be executed at a predetermined period of time, a predetermined price and towards a predetermined purchasing entity. Once investments have been realised after the first investment cycle, the funds so generated will be reinvested into MFIs for the second investment cycle. Impulse Investment Guidelines 5/5